UNIVERSITY  OF  CALIFORNIA 


Finances  of  the  United  States 
in  the  Spanish  War 


THREE  LECTURES 

BY 

CARL  C.  PLEHN 


[Reprinted  from  THE  UNIVERSITY  CHRONICLE,  Vol.  I,  No.  5] 


BERKELEY 

THE  UNIVERSITY  PRESS 

1898 


UNIVERSITY  OF  CALIFORNIA 


Finances  of  the  United  States 
in  the  Spanish  War 


THREE  LECTURES 

BY 

CARL  C.  PLEHN 


[Reprinted  from  THE  UNIVERSITY  CHRONICLE,  Vol.  I,  No.  5] 


BERKELEY 

THE  UNIVERSITY  PRESS 
1898 


OUR  FINANCES  IN  THE  SPANISH  WAR.  419 


oft  Library 


FINANCES  OF  THE  UNITED  STATES 
IN  THE  SPANISH  WAR.* 


By  CARL  C.  PLEHN. 


I.— RAISING  THE  FUNDS. 

There  were  many  things  connected  with  the  management 
of  the  war  with  Spain  which  reflected  great  credit  on  the 
government  of  the  United  States.  Not  less  creditable  than 
the  exploits  of  our  army  and  navy  was  the  general  financial 
administration  of  the  war.  The  vast  sums  requisite  were 
obtained  promptly  and  without  serious  disturbance  of  the 
money  market  or  of  the  general  level  of  prices.  We  floated 
a  war  loan  with  the  utmost  ease  at  a  rate  of  interest  lower 
than  that  which  any  nation  has  ever  before  paid  during  war 
times;  and  for  the  first  time  in  our  history  the  credit  of 
the  country  was  so  used  that  it  grew  stronger  rather  than 
weaker  from  its  use. 

While  there  are  many  features  of  the  war  revenue  bill 
itself  which  are  open  to  criticism,  especially  in  that  part 
which  deals  with  taxation,  yet  the  general  plan  for  the  fiscal 
administration  of  the  war  is  in  almost  exact  accord  with 
the  accepted  principles  of  Public  Finance.  In  this  respect 
it  forms  a  striking  contrast  to  the  fiscal  management  of 
any  other  war  by  the  United  States. 

*  Three  lectures  delivered  before  the  students  in  History  and  Political  Science, 
September  22  and  29,  and  October  6,  1898. 


420  UNIVERSITY  CHRONICLE. 

Before  beginning  to  study  the  actual  administration  of 
our  finances  in  the  recent  war  it  will  be  conducive  to  clear- 
ness if  we  recall,  briefly,  what  is  generally  considered  to  be 
the  sound  method  for  the  fiscal  administration  of  a  war.  A 
serious  war  usually  imposes  a  sudden,  new  burden  upon  the 
treasury,  the  exact,  or  even  the  approximate,  size  of  which 
it  is  not  possible  to  estimate  at  the  outset.  Many  of  the 
expenses  of  war  belong  to  that  class  which  financiers  call 
"extra- ordinary"  to  distinguish  them  from  the  usual  or 
current  expenses  of  the  government.  The  amount  by 
which  the  ordinary  expenses  are  increased  in  time  of  war 
depends  upon  many  circumstances.  Obviously,  the  chief 
factor  is  the  size  of  the  forces  engaged  and  the  duration  of 
the  struggle.  Naturally,  the  chastisement  of  a  few  dozen 
hostile  Indian  braves  in  the  immediate  vicinity  of  the  regu- 
lar army  posts  involves  practically  no  "extra-ordinary" 
expenses.  Allowance  is  usually  made  in  the  ordinary 
budget  for  the  expenses  a  war  of  that  kind  would  occasion. 
But  many  circumstances  less  obvious  than  the  size  of  the 
forces  engaged  enter  into  the  determination  of  the  amount 
of  the  "extra- ordinary"  expenditures.  Thus,  for  example, 
a  naval  war,  unless  it  happens  to  become  the  occasion  for 
the  purchase  of  new  ships,  involves  comparatively  little 
addition  to  the  ordinary  expenses  of  maintaining  the  navy. 
A  country  which  has  a  large  standing  army  incurs  relatively 
less  "extra-ordinary"  expense  when  engaging  in  war  than 
a  country  which  like  ours  has  only  a  small  regular  army. 
For  very  obvious  reasons,  practically  all  the  expenses  of 
this  war  except  so  far  as  the  regular  navy  was  engaged 
were  among  the  "extra-ordinary"  ones,  and  had  to  be  met 
by  the  treasury  by  means  of  distinct  additions  to  our 
ordinary  revenues. 

The  ordinary  expenses  being  provided  for  by  the  regular 
budget  the  financier's  whole  concern  in  time  of  war  is  the 
provision  of  the  "extra-ordinary"  funds.  If  the  operations 
of  the  war  are  likely  to  interfere  with  the  ordinary  revenues 
he  must  furthermore  be  prepared  to  treat  a  part  of  the 


OUR  FINANCES  IN  THE  SPANISH  WAR.  421 

ordinary  expenses  as  "extra-ordinary,"  at  least  to  the 
extent  of  furnishing  new  means  to  meet  them.  It  is  not 
often  possible,  and  still  less  often  expedient  to  curtail  the 
ordinary  expenditures  in  any  way  for  the  purpose  of  saving 
money  to  meet  the  new  expenses.  How  to  increase  the 
receipts  of  the  treasury  by  an  amount  sufficient  to  ensure 
the  efficient  conduct  of  the  war,  without  too  serious  dis- 
turbance of  the  industries  and  commerce  of  the  people, 
upon  which  all  the  revenues  depend,  is  the  problem  for  the 
finance  minister  to  solve.  The  "extra-ordinary"  demands 
come  thick  and  fast,  especially  at  the  beginning  of  the  war 
and  they  must  be  met  and  met  at  once.  The  amount 
which  may  be  needed  at  any  given  time  is  not  ascertain- 
able.  But  in  spite  of  that,  sufficient  funds  must  always  be 
on  hand.  Upon  this  more  than  upon  any  other  one  thing 
depends  the  fate  of  war.  The  war  financier  can  never 
plead  that  he  has  no  funds,  nor  can  he  ask  for  time  in 
which  to  collect.  He  must  have  the  money  when  it  is 
wanted  and  in  the  amounts  required.  No  degree  of  skill 
on  the  part  of  officers  or  bravery  on  the  part  of  the  men, 
no  degree  of  self-sacrifice  at  the  front  can  compensate  for 
failure  on  the  part  of  the  financier  to  provide  the  ways  and 
means.  His  powers  are,  therefore,  of  the  greatest  and 
most  unusual. 

Possibly  the  most  natural  source  to  turn  to  in  time  of 
war  for  the  increased  revenues  needed  is  the  existing 
system  of  taxes.  At  first  thought  it  might  seem  proper  to 
attempt  to  obtain  new  income  by  raising  the  rates  of  the 
old  taxes.  To  some  extent  this  is  possible.  In  every  well- 
arranged  tax-system  there  should  be  some  taxes  which  can 
be  made  to  yield  an  increased  revenue  by  simply  raising  the 
rates.  One  of  the  chief  reasons  for  the  establishment  and 
the  retention  of  the  British  "property  and  income  tax,"  for 
example,  is  found  in  the  elasticity  of  the  returns.  But  not 
all  taxes  can  be  treated  in  this  way.  Sometimes  an 
increase  in  the  rate  of  taxation  will  disturb  industry  and 
commerce  and  do  a  greater  injury  to  the  welfare  of  the 


422  UNIVERSITY  CHRONICLE. 

people  than  is  received  from  the  damages  of  war.  Again 
an  increase  in  the  rates  of  certain  taxes  will  diminish  the 
revenue  or  even  destroy  it  entirely.  In  not  a  few  taxes  the 
only  way  to  increase  the  revenue  is  to  lower  the  rates. 
This  is  the  case  with  most  protective  duties.  Any  change 
in  the  rate  of  such  taxes  is  bound  to  affect  industry  and 
commerce,  and  to  affect  them  unfavorably  in  the  first 
instance,  whatever  the  subsequent  effect  may  be.  A  war 
brings  perplexities  enough  to  business  without  the  creation 
of  artificial  ones,  and  the  financier  should  not  interfere  with 
these  taxes.  It  added  not  a  little  to  the  perplexities  and 
dangers  of  the  civil  war  that  the  industry  and  commerce  of 
the  people  were  repeatedly  disturbed  during  the  war  by 
changes  in  the  tariff  as  well  as  by  the  military  and  naval 
operations  themselves.  There  are,  therefore,  but  a  limited 
number  of  old  taxes  from  which  any  aid  can  be  sought. 
In  our  own  country  owing  to  our  one-sided  system  of 
taxation,  the  number  of  them  is  very  small  indeed.  The 
financier  must  look  elsewhere  for  his  new  revenues. 

The  next  resource,  naturally,  is  new  taxes.  But  the 
establishment  of  new  taxes  or  even  the  restoration  of  old 
taxes  not  in  use  at  the  time  of  the  war  is  a  matter  requiring 
considerable  time.  Even  if  it  were  an  easy  matter  to  decide 
upon  the  best  form  of  taxation  and  to  get  the  necessary 
authority  from  the  legislative  branch  of  the  government, 
the  organization  of  the  new  administrative  forces  for  the 
collection  of  the  taxes  is  a  matter  requiring  time.  No 
new  system  of  taxation  reaches  its  normal  revenue- 
yielding  powers  within  many  months  of  its  enactment.  If 
the  taxes  are  entirely  new  the  time  required  is  longer.  But 
even  if  they  are  more  or  less  familiar  to  the  people  from  use 
on  some  previous  occasion,  a  considerable  lapse  of  time 
must  intervene  between  the  beginning  of  war  and  the 
receipt  of  sufficient  new  revenues  to  meet  any  considerable 
part  of  its  expenses.  Furthermore,  the  expenses  of  war 
are  now  so  enormous  that  any  system  of  taxation  which 
raised,  or  attempted  to  raise,  the  entire  amount  needed 


OUR  FINANCES  IN  THE  SPANISH  WAE.  423 

during  the  probable  duration  of  the  war  would  be  so 
burdensome  as  to  crush  the  people .  It  is  therefore  extremely 
unwise,  and  practically  impossible,  to  attempt  to  raise  the 
entire  cost  of  the  war  by  immediate  taxation.  The  only 
other  resource  is  borrowing. 

The  use  of  the  public  credit,  in  time  of  war,  is  attended 
by  many  special  difficulties.  The  outcome  of  war  is  always 
more  or  less  uncertain.  Even  if  defeat  would  not  entirely 
cripple  the  nation's  resources  and  render  the  repayment  of 
the  loan  uncertain,  or  affect  the  payment  of  interest,  yet 
there  are  many  considerations  which  make  the  lender 
hesitate.  The  fact  that  the  duration  of  the  war,  the  extent 
to  which  other  nations  may  become  involved,  and  many 
similar  considerations  affecting  the  size  of  the  total  demand 
upon  the  public  credit  are  unknown,  vastly  increases  the 
difficulty  of  placing  a  loan  on  favorable  terms.  But  on  that 
very  account  it  is  particularly  necessary  for  the  successful 
administration  of  the  war  that  everything  should  be  done 
to  strengthen  and  preserve  the  nation's  credit.  There  may 
come  a  time  in  the  progress  of  the  war  when  the  only 
source  from  which  any  funds  can  be  had  is  the  money 
market.  If,  therefore,  the  financier  has  done  anything  to 
weaken  the  nation's  credit  at  the  beginning  of  the  war  he 
is  apt  to  be  helpless  at  the  close.  Credit  tends  to  weaken 
as  debt  increases. 

It  is  for  this  reason  that  resort  is  usually  had  in  early 
war-borrowings  to  the  simplest  and  most  primitve  method 
of  debt-making:  namely,  that  which  provides  revenues  for 
the  payment  of  the  interest  and  the  repayment  of  the 
principal  at  the  very  time  the  debt  is  contracted.  The 
creditor  sees  in  the  new  funds  flowing  into  the  treasury  the 
security  for  his  advances,  and  the  guarantee  of  good  faith 
on  the  part  of  the  government.  So  long  as  every  new  loan 
is  accompanied  by  new  taxes  from  which  its  cost  can  be 
met  the  public  credit  is  practically  secure.  But  if  on  the 
other  hand  the  government  neglect  this  precaution  during 
the  first  stages  of  the  war,  any  attempt  to  resort  to  it  at  a 


424  UNIVERSITY  CHRONICLE. 

later  stage  is  apt  to  be  regarded  as  the  desperate  device  of 
unsound  financial  management  and  the  presage  of  coming 
bankruptcy. 

Public  credit  is  a  plant  of  slow  growth  and  extremely 
tender.  It  withers  in  a  day  before  a  breath  of  doubt. 

Inasmuch  as  a  successful  outcome  cannot  be  hoped  for 
in  modern  warfare  without  the  funds  obtainable  solely  by 
public  borrowing,  and  the  necessity  for  loans  increases  the 
longer  the  war  continues,  it  behooves  the  modern  war 
financier  to  guard  the  nation's  credit  as  his  most  precious 
treasure.  No  sacrifice  is  too  great  which  will  strengthen  it 
and  preserve  it  intact  for  the  later  stages  of  the  war. 

Such,  stated  in  a  form  almost  too  condensed  for  perfect 
clearness,  are  the  principles  which  should  guide  the  fiscus 
in  time  of  war.  No  better  illustration  of  the  application  of 
these  principles  can  be  found  in  history  than  is  afforded  by 
our  recent  war. 

The  situation,  as  it  confronted  Secretary  Gage  when  the 
news  of  the  destruction  of  the  Maine  reached  Washington, 
may  be  summarised  somewhat  as  follows:  The  Treasury 
had  a  balance  on  hand  of  about  $225,000,000.  But,  as  we 
shall  see  in  a  moment,  only  about  $25,000,000  of  this  was 
really  available  -for  immediate  use  in  the  prosecution  of  the 
war.  The  ordinary  expenditures  of  the  government,  out- 
side of  those  for  the  postal  system,  which  is  nearly  self- 
supporting,  amounted  in  round  numbers  to  $350,000,000 
per  annum.  For  the  first  time  in  many  months  these 
expenses  were  being  nearly  met  by  the  revenues.  Indeed 
it  was  estimated  that  at  the  ordinary  rate  of  expenditures 
there  might  be  a  slight  surplus  at  the  end  of  the  year. 
The  tariff  was  expected  to  yield  about  $200,000,000,  the 
internal  revenue  taxes  about  $165,000,000,  and  there  were 
about  $25,000,000  to  be  expected  from  miscellaneous 
sources. 

The  larger  part  of  the  income,  however,  came  from 
taxes  which  could  not  well  be  tampered  with.  The  tariff 
had  been  so  long  a  subject  of  controversy,  that  there  was 


OUR  FINANCES  IN  THE  SPANISH  WAR.  425 

little  desire  to  alter  its   recent  settlement.      For  reasons 
already  made  clear  there  were   many  parts  of   the  tariff 
which  could  not  well  be  changed.     Except  in  a  very  few 
instances  the  income  to  be  obtained  from  it  would  not  be 
increased  by  raising  the  rates.     In  the  great  majority  of 
instances  to  raise  the  rates  would  have  been  to  lessen  the 
receipts,    while   to   lower   those   rates  for  the  purpose  of 
increasing  the  income  by  allowing  larger  importations  would 
have   been   to  remove   the   protection   afforded  by  them. 
This  was  contrary  to  the  avowed  policy  of  the  administra- 
tion.    It  would,  moreover,  have  served  to  disturb  industry 
and  to  preplex  its  leaders  at  a  time   already  sufficiently 
disquieting,  and  might  have  proved  but  an  aggravation  of 
the  disturbance  caused  by  the  war.     The  great  body  of  the 
customs  rates,  of  which  there  are  thousands  on  our  tariff 
schedules,  are  not  productive  of  much  revenue  and  are  not 
intended  to  be.     They  are  there  to  restrict  importations. 
These  certainly  could  not  well  be  changed.     Of  the  bare 
dozen  or  so  of  articles  of  importation  which  do  yield  a 
revenue,  sugar,  one  of  the  most  important,  was  likely  to  be 
interfered  with  by  the  war.     At  the  existing  rates,  sugar 
imported  should  yield  a  revenue  of  about  $80,000,000  a 
year,  but  at  least  half  of  the  importation  was  jeopardized 
by  the  war  itself  and  it  would  have  been  highly  impolitic  to 
have  changed  the  rate  at  this  time.     Iron,  which  was  once 
a  source  of  considerable  revenue,  was,  in  consequence  of 
the  changes  which  have  taken  place  in  that  industry,  and 
of  the  protective  features  of  the  customs  law,  not  available 
to  provide  new  revenues,  as  the  importations  are  at  best 
small.     Cotton  goods,  the  tax  upon  which  yields  consider- 
able  revenue,   were   protected;    so  were   manufactures  of 
hemp,   flax   and   jute,   of   leather   and  of  wool.      Drugs, 
medicines,  and  chemicals  were  already  taxed  up  to  the  limit 
of  productiveness  from  a  revenue  point  of  view.     In  short 
there   were   but   four  important   articles   imported  which 
might  be  used  to  yield  additional  revenue.      These  were 
hides  and  skins,  raw  silk,  and  tea  and  coffee.     To  tax  hides 


426  UNIVERSITY  CHRONICLE. 

and  skins,  and  raw  silk  would,  probably,  under  the  prevail- 
ing theory  of  "compensatory"  duties,  have  involved  an 
increase  in  the  rates  on  the  products  manufactured  from 
them,  to  maintain  the  same  degree  of  protection  that  those 
products  now  enjoy.  That  would  have  reopened  the  whole 
tariff  controversy  and  have  rendered  the  outcome  of  the 
war-revenue  measure  extremely  doubtful.  Clearly  it  were 
wisest,  considering  how  recently  the  tariff  issue  had  been 
temporarily  settled,  to  leave  them  alone.  As  a  matter  of 
fact,  then,  there  are  only  two  articles  in  the  whole  list  of 
importations  which  might  be  considered  by  the  Secretary 
of  the  Treasury  in  his  search  for  new  income.  These  were 
tea  and  coffee,  which  might,  perhaps,  have  been  made  to 
yield  together  nearly  $80,000,000  additional  revenue.  That 
was  approximately  all  that  could  be  expected  from  the  tariff. 

In  the  war  revenue  bill  as  presented  to  the  House  of 
Representatives  by  the  Committee  on  Ways  and  Means, 
of  which  Mr.  Dingley  was  chairman,  there  was  no  sugges- 
tion of  using  the  tariff  in  any  way  for  obtaining  additional 
revenue.  It  was  not  until  the  very  end  of  the  long  dis- 
cussion of  the  measure  in  the  Senate  that  it  was  proposed 
to  put  a  duty  of  10  cents  a  pound  on  tea.  That  measure 
passed  the  Senate  and  was  accepted  by  the  conference 
between  the  two  Houses  and  by  the  House  of  Represent- 
atives without  any  public  discussion  as  to  its  merits.  The 
reason  for  this  duty,  as  for  the  omission  of  coffee  from  the 
list,  is  therefore  not  clear.  The  tax  on  tea  is  an  important 
matter.  The  yield  will  be  over  $10,000,000  per  annum. 
A  similar  tax  on  coffee,  which  would  have  been  at  the  rate 
of  8.5  cents  per  pound,  would  have  yielded  about  $70,000,000 
more.  It  is,  therefore,  somewhat  surprising  that  it  should 
have  attracted  so  little  attention  from  the  members  of 
Congress. 

Since  the  revenue  from  the  tariff  was  not  to  be  increased 
the  only  resource  available  was  internal  taxes.  That  these 
internal  taxes  should  have  taken  the  same  general  form 
as  the  taxes  used  during  the  civil  war,  and  consequently 


OUR  FINANCES  IN  THE  SPANISH  WAS.  427 

more  or  less  familiar  to  people  and  officers,  was  but 
natural.  Under  the  stress  of  war  it  is  unwise  to  attempt 
to  organize  entirely  new  taxes,  such,  for  example,  as  an 
income  tax.  Though  an  income  tax  had  been  used 
during  the  civil  war,  that  form  of  taxation  was  under  the 
shadow  of  an  adverse  decision  from  the  Supreme  Court. 
Even  if  an  income  tax  law  which  would  have  been  con- 
stitutional, according  to  the  recent  decision  of  the  court, 
could  have  been  drawn,  it  is  doubtful  whether  it  could  have 
been  made  productive  within  any  reasonable  period  of  time. 
Recourse  might  have  been  had  to  direct  taxes  apportioned 
among  the  States  according  to  population.  These  taxes 
could  then  have  been  raised  in  any  manner  which  the  State 
authorities  chose.  But  there  are  two  fatal  objections  to 
this  plan.  The  apportionment  of  taxes  according  to  popu- 
lation is  fundamentally  unjust  and  unequal.  What  it 
amounts  to  practically  is  a  graduated  poll  tax.  The  dif- 
ferent commonwealths  vary  so  in  wealth  per  capita  that  any 
per  capita  tax,  however  raised,  would  be  unfair.  Although 
the  census  estimate  of  wealth  in  1890  was  anything  but 
satisfactory,  yet  the  method  used  in  that  estimate  was 
uniform  throughout  the  country;  and  such  differences  as 
that  between  South  Carolina,  with  about  $350  per  capita, 
and  Nevada,  with  $4,000  per  capita,  show  how  utterly 
inadequate  the  constitutional  method  of  raising  direct  taxes 
has  become.  Then  again,  the  method  of  taxation  by  which 
most  of  the  States  raise  their  revenues,  and  which  they 
would  probably  follow  in  raising  their  share  of  any  appor- 
tioned taxes,  is  the  worst  in  use  in  any  civilized  country 
and  the  injustice  of  the  apportionment  would  have  been 
enormously  increased  by  the  injustice  in  collection.  The 
second  objection  to  this  method  of  raising  direct  taxes 
prescribed  by  the  constitution  is  that  it  takes  an  inordinate 
length  of  time,  and  war  taxes  should  begin  to  yield  a 
revenue  as  early  as  possible. 

The   only  available   plan   was,   therefore,   to  seek  ad- 
ditional revenue  from  the  existing,  indirect,  internal  taxes, 


428  UNIVERSITY  CHRONICLE. 

the  excises  or,  as  we  call  them,  the  "internal  revenue 
taxes,  and  to  supplement  these  still  further  by  new  taxes  of 
the  same  sort.  The  critical  examination  of  the  war  revenue- 
bill  forms  the  subject  of  the  second  of  these  lectures,  so  I 
must  content  myself  here  with  the  brief  statement  that  the 
government  resorted  at  this  critical  period  to  increased  rates 
on  some  of  the  existing  internal  revenue  taxes  and  to 
certain  of  the  taxes  used  during  the  Civil  War.  Briefly 
summarized  the  revenue  bill  nearly  doubled  the  existing 
rate  of  taxation  upon  beer  and  other  similar  fermented 
liquors;  it  imposed  special  taxes  on  bankers,  brokers,  pawn- 
brokers, theatres,  circuses,  and  other  shows,  bowling-alleys 
and  billiard  rooms ;  it  raised  the  rates  on  tobacco  of  all  kinds ; 
and  placed  stamp  taxes  on  stocks  and  bonds,  commercial 
papers,  legal  documents,  checks  and  drafts,  proprietary 
medicines,  toilet  articles,  bills  of  lading,  insurance  policies, 
and  a  number  of  other  things.  Special  direct  taxes  were 
imposed  on  the  oil-trust  and  the  sugar- trust;  and  on 
legacies  and  distributive  shares  of  personal  property. 

As  the  war  revenue  bill  passed  the  House  its  probable 
yield  was  variously  estimated  at  from  $90,000,000  to 
$105,000,000  per  annum,  the  former  being  the  better  esti- 
mate. As  amended  in  the  Senate  and  finally  adopted,  it 
promised  to  yield  at  least  $150,000,000  per  annum.  The 
actual  yield  in  addition  to  the  regular  revenue  during  the 
first  month  was  about  $13,000,000  which  speaks  well  for 
the  probable  accuracy  of  this  estimate.  But  the  expenses 
of  war  during  the  first  few  months,  if  not  for  a  long  time 
after  that,  would  be,  it  was  estimated,  at  least  double  that 
sum  and  possibly  more.  Therefore,  unless  the  Treasury  had 
a  considerable  balance  on  hand,  there  would  have  been  no 
possibility  of  conducting  the  war  at  all  without  immediate 
loans.  The  balance  in  the  Treasury  at  the  outbreak  of  the 
war  was  $225,000,000.  Upon  this  were  a  number  of  claims, 
some  of  which,  however,  were  not  immediate.  $100,000,000, 
known  as  the  gold  reserve,  had  to  be  held  for  the  preserva- 
tion of  the  parity  of  all  parts  of  the  circulation  and  the 


OUR  FINANCES  IN  THE  SPANISH  WAR.  429 

avoidance  of  general  financial  ruin.  Then  there  were 
$13,000,000  of  fractional  silver  and  minor  coins,  a  large 
part  of  which  was  worn  and  unavailable,  while  the  rest 
was  needed  for  currency  purposes  throughout  the  country. 
$14,000,000  had  been  received  from  the  sale  of  the  Pacific 
Railroads ;  but  although  this  sum  was  temporarily  available  it 
would,  if  it  were  spent,  be  necessary  to  raise  an  equivalent 
amount  before  January  first  to  meet  the  Pacific  Railroad 
bonds  which  came  due  at  that  time.  $33,000,000  were  held 
in  trust  for  the  redemption  of  the  notes  of  national  banks 
which  had  failed  or  which  were  redeeming  their  circulation . 
A  part  of  this  was  temporarily  available  but  it  would  be 
necessary  to  replenish  that  fund  at  an  early  date  if  much 
were  drawn  from  it.  There  were  then,  out  of  the 
$225,000,000,  $160,000,000  of  which  a  small  part  only  was 
available  and  that  but  for  a  short  time.  Anything  drawn 
upon  that  would  have  to  be  replaced  by  January  first  at 
latest.  Of  the  $65,000,000  remaining  $40,000,000  were 
necessary  as  the  cash  on  hand  for  the  ordinary  operations 
of  the  government.  That  amount  corresponds  to  the  cash 
on  hand  which  a  merchant  keeps  in  the  till  to  make  change 
or  to  meet  small  bills.  This  left  but  $25,000,000  for  the 
initial  expenses  of  the  war  which  in  our  state  of  unpre- 
paredness  would  naturally  be  above  the  average.  This 
$25,000,000  was  all  the  unencumbered  money  in  the 
Treasury  to  meet  the  appropriation  of  $50,000,000  made  by 
Congress  before  war  was  declared.  It  was  clear  that  the 
Secretary  of  the  Treasury  could  not  provide  the  sinews  of 
war  without  the  power  to  borrow,  both  for  a  short  time,  to 
anticipate  the  revenues  expected  from  the  new  taxes,  and 
for  a  long  time  to  enable  him  to  support  any  naval  and 
military  operations  which  might  become  necessary,  however 
extensive. 

After  much  discussion  and  more  or  less  unnecessary  and 
dangerous  delay,  especially  in  the  Senate,  Congress  author- 
ized the  borrowing,  at  the  discretion  of  the  administration, 
of  not  more  than  $100,000,000  at  any  one  time  on  Treasury 


430  UNIVERSITY  CHRONICLE. 

certificates  and  of  an  amount  not  to  exceed  $400,000,000  on 
10-20  bonds  at  three  per  cent.  Nominally,  therefore,  the 
Secretary  of  the  Treasury  had  in  his  hands  for  the  necessi- 
ties of  war  during  the  first  six  months  of  its  duration: 

Surplus  on  hand $  25,000,000 

War  revenues 75,000,000 

Temporary  loans 100,000,000 

Bonds  400,000,000 

Total $600,000,000 

Practically,  he  was  limited  by  the  fact  that  all  of  this 
money  had  not  been  appropriated  and  it  would  have  been 
folly  to  raise  more  than  he  had  authority  to  spend. 
Including  the  $50,000,000  appropriated  before  the  war 
broke  out,  the  total  war  appropriations  made  by  Congress 
before  it  adjourned  amounted  in  all  to  $361,788,095.11. 
This  sum  covered  the  most  generous  estimates  of  the  prob- 
able cost  of  the  war.  It  is  not  possible  at  the  present  time 
to  obtain  a  complete  estimate  or  a  detailed  account  of 
the  actual  expenses  of  the  war.  There  is  little  doubt, 
however,  but  that  they  will  fall  well  within  the  appropria- 
tions. Even  though  the  war  is  over,  the  "extra- ordinary" 
demands  on  the  Treasury  will  not  cease  for  many  months  to 
come.  To  the  end  of  July,  the  expenses  were  about 
$90,000,000;  to  the  end  of  August  about  $115,000,000; 
and  for  the  six  months  they  will  probably  be  well  within 
$175,000,000,  or  within  half  of  the  appropriations.  The 
Treasury,  meanwhile,  has  been  in  the  receipt  of  about 
$13,000,000  a  month  additional  revenues,  or  about  $75,000, 
000  for  six  months.  It  has  also  raised  $200,000,000  by 
the  sale  of  10-20  bonds  at  three  per  cent.,  a  total  of 
$275,000,000,  or  nearly  $100,000,000  in  excess  of  the 
probable  actual  expenditure  for  the  six  months.  Although 
the  accumulation  of  this  surplus  will  give  rise  to  many 
interesting  problems  in  the  future,  it  was  not  in  any  sense 
an  extravagant  or  useless  piece  of  financiering.  As  was 
stated  in  the  beginning  of  this  lecture,  the  Treasmy  must  be 
prepared  to  meet  any  demand  that  may  arise,  instantly  and 


OUR  FINANCES  IN  THE  SPANISH  WAR.  431 

amply.  That  is  an  imperative  necessity.  As  the  early 
close  of  the  war  could  not  have  been  foreseen,  the  fiscal 
preparations  were  necessarily  liberal.  Indeed  the  amplitude 
of  the  funds  available  was  one  of  the  most  potent  causes  of 
the  success  of  the  war.  The  excess  raised  was  not  larger 
than  was  necessary  to  insure  the  instant  readiness  of  the 
Treasury  to  meet  all  possible  demands.  Had  the  war  con- 
tinued and  the  demands  equalled  the  appropriations,  the 
Treasury  would  again  have  been  obliged  to  use  its  power  of 
borrowing  which  the  fortunate  termination  of  the  war 
rendered  unnecessary. 

So  far  the  general  plan  of  the  financial  administration  of 
the  war  corresponds  to  the  ideal  plan.  It  remains  to  see 
how  the  credit  of  the  nation  stood  the  strain.  As  a  matter 
of  fact  we  have  come  out  of  the  war  stronger  in  credit  than 
we  went  in,  and  this  in  itself  is  a  remarkable  feat.  Let  us 
see  how  it  was  accomplished. 

At  the  end  of  April,  1898,  the  interest  bearing  debt  of 
the  United  States  amounted  in  round  numbers  to  $847,000, 
000.  $100,000,000  of  this  bore  interest  nominally  at  five 
per  cent.,  the  balance  at  four  per  cent.  The  four  per  cent, 
bonds  payable  in  1895  were  quoted,  when  the  plans  were 
being  made  for  placing  the  new  loan,  at  117J.  At  that  rate 
they  would  yield  the  investor  three  and  one-quarter  per 
cent,  interest.  There  was,  therefore,  some  surprise  when 
it  was  proposed  to  place  the  new  loan  at  three  per  cent.  It 
was  urged  that  nobody  would  buy  the  new  bond  at  three  per 
cent,  when  he  could  buy  one  of  the  old  ones  and  get  three 
and  one-quarter  per  cent.  Yet  the  outcome  showed  the 
wisdom  of  the  move.  The  bonds  were  subscribed  to  seven 
times  over  and  in  a  short  time  rose  to  a  premium  of  103  and 
105.  In  fact  the  entire  loan  was  easily  placed  on  far  better 
terms  than  any  nation  has  ever  before  been  able  to  obtain 
in  time  of  war.  This  remarkable  result  was  attained  partly 
by  reason  of  the  fact  that  the  loan  was  offered  for  popular 
subscriptions  and  the  bonds  were  for  small  amounts,  thus 
creating  and  reaching  a  new  market  among  investors  of 


432 


UNIVERSITY  CHRONICLE. 


small  means.  In  part,  too,  it  was  due  to  the  fact  that  the 
new  bonds  at  par  really  formed  a  better  basis  for  the 
national  bank-note  circulation  than  the  old  bonds  at  117J, 
and  very  much  better  than  the  old  bonds  at  123J,  the  price 
which  was  reached  before  the  new  issue  was  completed. 
An  investment  by  a  national  bank  of  $100,000  in  the  old 
bonds  at  117i  would  yield  a  profit  of  $736.70  on  the  circula- 
tion, if  interest  is  at  six  per  cent. ;  while  an  investment  of 
the  same  amount  in  the  new  bonds  at  par  would  yield  a 
profit  on  the  circulation  of  $1,302.02.  The  difference  in 
favor  of  the  new  bonds  was  $565.32,  or  over  half  of  one  per 
cent.  The  advantage  is  still  greater  now  as  the  old  4's  are 
at  127J.*  None  of  these  influences,  however,  would  have 
had  any  weight  had  it  not  been  that  new  revenues  sufficient 
to  meet  all  debt  charges  and  part  of  the  war  expenses  had 
been  provided. 

Much  interest  centers  around  the  successful  attempt  to 
make  this  a  popular  loan.  Congress  after  much  discussion, 
finally  provided  that  these  three  per  cent,  bonds  "redeemable 
in  coin  at  the  pleasure  of  the  United  States  after  ten  years 
from  the  date  of  their  issue  and  payable  twenty  years  from 


*  COMPARATIVE  ILLUSTRATION  OF  $100,000  INVESTMENT. 


3's  OF  1908-18  AT  PAR. 

4's  OF  1925  AT  117i 

Par  value  of  bonds  purchased 

$100,000 
90,000 

5,400 
3,000 

$85,287.84 
79,759.05 

4,605.54 
3,411.51 

Circulation  

Receipts: 
Interest  on  circulation,  6#  

Interest  on  bonds         

Deductions  : 
Tax  on  circulation 

900 
60.50 
137.48 

$8,400 

852.87 
60.50 
137.48 
229.50 

$8,017.05 

Expenses  

Annual  cost  of  redemption 

Sinking  fund  to  liquidate  premium 
Net  receipts    ...        

1,097.98 

1,280.35 
$6,736.70 
6,000 

$7,302.02 
6,000 

Receipts  if  capital  had  been  invested,  6< 
Profit  on  circulation 

$1,302.02 

$  736.70 

Advantage  of  3's  at  par  over  the  4's  at  117i,  $565.32  or  .565*. 


OUR  FINANCES  IN  THE  SPANISH  WAR.  433 

that  date,"  should  "be  first  offered  at  par  as  a  popular  loan 
under  such  regulations,  prescribed  by  the  Secretary  of  the 
Treasury,  as  will  give  opportunity  to  the  citizens  of  the 
United  States  to  participate  in  the  subscriptions  to  such 
loan,  and  in  allotting  such  bonds  the  several  subscriptions 
of  individuals  shall  be  first  accepted,  and  the  subscriptions 
for  the  lowest  amounts  shall  be  first  allotted."  Before  the 
bill  was  finally  passed  offers  had  been  made  by  various 
banking  houses  to  take  the  whole  issue  at  a  slight  premium. 
Both  Congress  and  the  Administration,  however,  favored 
the  experiment  of  interesting  a  large  number  of  small 
property-owners  in  the  loan,  even  at  a  loss  to  government. 
It  was  thought  that  such  a  measure  would  strengthen  the 
national  credit  by  giving  expression  to  the  faith  of  our  own 
people  in  the  integrity  of  the  government.  Other  considera- 
tions of  a  political  character  also  entered  in,  but  with  them 
we  are  not  concerned.  As  a  financial  measure  for  the 
strengthening  and  support  of  the  public  credit  it  proved  a 
phenomenal  success. 

The  bonds  were  issued  in  denominations  as  low  as  $20. 
Subscriptions  were  received  through  the  post-office,  and 
every  ~bona  fide  subscription  under  $500  was  immediately 
accepted.  More  than  half  of  the  entire  issue  was  taken  by 
230,000  of  these  small  subscriptions,  and  no  subscription  of 
more  than  $4,500  was  accepted.  In  all  320,000  persons 
offered  or  made  subscriptions,  and  the  total  amount  tendered 
the  government  was  $1,400,000,000.  This  rush  for  the  new 
bonds  was  not  merely  a  matter  of  patriotism  or  sentiment. 
During  the  progress  of  the  subscriptions  the  price  of  the 
bonds  advanced  first  to  102  and  finally  to  105  J.  They  now 
stand  at  about  105.  The  lucky  individuals  whose  subscrip- 
tions were  accepted  made  from  three  per  cent,  to  five  per 
cent,  in  a  few  days.  The  popularity  of  these  bonds  was 
greatly  enhanced  by  the  standing  offers  obtained  by 
Secretary  Gage  from  two  syndicates  to  take  the  entire  loan 
or  any  part  of  it  that  was  not  covered  by  the  popular 
subscriptions. 


434  UNIVERSITY  CHRONICLE. 

This  method  of  floating  the  loan  will  cost  the  government 
a  considerable  amount.  In  the  first  place  it  lost  a  possible 
premium.  How  much  that  premium  would  have  been 
cannot  be  estimated  because  the  bonds  were  sold  in  a 
broader  market  than  would  have  otherwise  existed.  But  it 
would  have  been  at  least  two  per  cent . ,  for  even  at  a  higher 
rate  the  bonds  offer  a  favorable  basis  for  national  bank  note 
circulation.  That  is,  at  least  $4,000,000  was  lost  at  the 
beginning.  Then  the  cost  of  handling  the  loan,  paying  the 
interest,  etc.,  is  increased  considerably  by  the  small  size  of 
the  bonds  and  the  large  number  of  holders.  It  is  just  as 
much  trouble  to  pay  the  15  cent  coupon  of  a  $20  bond  as 
it  is  to  pay  the  $75  coupon  of  a  $10,000  bond.  Yet  in  spite 
of  all  this,  the  placing  of  the  $200,000,000  loan  of  1898  was 
one  of  the  most  successful  pieces  of  financiering  ever  accom- 
plished by  our  government.  It  demonstrated  the  perfect 
solvency  of  the  government ;  it  gave  us  a  financial  prestige 
which  went  a  long  way  toward  hastening  the  end  of  the 
war;  and  it  so  strengthened  our  credit  that,  had  the  war 
unfortunately  continued,  we  should  have  been  able  to 
obtain  funds  to  almost  any  amount  on  the  most  favorable 
terms  imaginable.  With  a  three  per  cent,  bond  selling  at 
105  during  the  actual  continuance  of  military  operations, 
we  can  safely  regard  our  credit  as  unimpaired. 

The  final  test  of  the  success  of  the  financial  administra- 
tion of  a  war  is  the  preservation  of  the  public  credit. 


II.— THE  NEW  TAXES. 

The  United  States  government  has  never  resorted  to 
internal  taxes,  except  to  pay  the  expenses  of  war,  and  with 
the  single  exception  of  the  Mexican  War,  we  have  waged 
no  war  without  the  use  of  internal  taxes.  The  first  system 
of  "internal  revenue  taxes",  as  we  have  learned  to  call 
them,  was  arranged  by  Hamilton,  1791," in  the  face  of  the 
most  bitter  opposition.  An  excise  was  declared  to  be  "the 
horror  of  all  free  states"  and  "hostile  to  the  liberties  of  the 


OUR  FINANCES  IN  THE  SPANISH  WAR.  435 

people."  On  account  of  the  general  hostility  to  that  form 
of  taxation — a  hostility  which  led  to  armed  resistance  in 
the  "Whiskey  Rebellion" — the  law  was  but  feebly  enforced. 
It  was  dubbed  by  Jefferson  an  "infernal  system,"  and 
finally  came  to  an  end  in  1802.  To  meet  the  expenses  of 
the  war  of  1812  Congress  again,  reluctantly,  resorted  to 
internal  taxation,  but  the  taxes  then  introduced  were  never 
satisfactory  and  were  hastily  abandoned  in  1817.  From 
that  time  to  the  outbreak  of  the  civil  war  no  internal  taxes 
were  levied  for  the  support  of  the  federal  government. 

The  entire  absence  of  any  internal  taxes  and  of  any 
elastic  element  in  the  tax-system  at  the  outbreak  of  the 
civil  war  added  greatly  to  the  difficulties  involved  in  raising 
the  revenues  needed.  Beginning  in  1862,  a  vast  and 
complex  system  of  internal  taxation  was  built  up.  Of  this 
comprehensive  system  an  acute  French  observer  said: 
"the  citizen  of  the  union  pays  a  tax  every  hour  of  the  day, 
either  directly  or  indirectly,  for  every  act  of  life;  on  his 
personal  and  real  property;  on  his  receipts  and  in  his 
expenses;  on  his  business  and  on  his  pleasures."* 

The  heavy  expenses  of  the  war  debt  necessitated  the 
retention  of  many  of  these  taxes  even  after  the  close  of  the 
war.  As  the  years  passed  by,  however,  the  most  burden- 
some ones  were  removed.  Still  a  sufficient  number  of 
important  internal  revenue  taxes  were  permanently  retained 
to  yield  about  $150,000,000  a  year.  The  continuance  of 
these  taxes  in  time  of  peace,  proved  of  great  advantage 
when  war  broke  out.  That  advantage  was  that  they  pro- 
vided the  administrative  organization  necessary  for  the 
collection  of  increased  revenues.  New  taxes  to  be  adminis- 
tered by  the  same  machinery  could  be  easily  imposed  and 
made  remunerative  within  a  very  short  time.  Indeed  there 
is  almost  no  precedent  in  financial  history  for  the  immediate 
returns  these  new  taxes  yielded.  The  income  from  them 
during  the  very  first  month  was  over  $12,000,000. 

For  the  reasons   explained  in  the  last  lecture  it  was 

*  E.  Duvergier  de  Hauranne.     Revne  de  deux  mondes,  August  15,  1865. 


436  UNIVERSITY  CHRONICLE. 

decided  to  raise  the  larger  part  of  the  revenue  needed  for 
the  war  by  enlarging  the  existing  system  of  internal  taxes. 
The  taxes  of  this  kind  in  use  were  of  three  principal  classes  : 

(1)  the  group  on  spirits,  yielding,  in  1897,  $82,008,543, 

(2)  the  group  on  tobacco,  yielding  $30,710,297,   (3)   the 
group  on  fermented  liquors,   yielding  $32,472,162.      The 
war  revenue  bill*  doubled  the  rates  in  two  of  these  groups 
and  rehabilitated  a  large  number  of  the  taxes  used  during 
the  civil  war.     The  principles  which  guided  the  selection  of 
the   different    taxes   were    stated    by   Mr.    Dingley   when 
explaining  the  bill  to  the  House  as  follows: 

"  They  ( the  Committee  on  Ways  and  Means )  naturally  have  had 
recourse  to  the  legislation  of  the  period  of  the  civil  war,  when  so  large 
an  amount  had  to  be  raised,  and  they  have  found,  after  a  careful  con- 
sideration of  the  question  of  taxation,  that  on  the  whole  it  is  better  at 
the  present  time,  and  we  trust  that  that  may  be  all  that  may  be 
necessary,  that  about  $100, 000, 000  additional  revenue  should  be  raised, 
and  that  entirely  through  internal  revenue  legislation.  Hence  the 
war  revenue  bill  which  has  been  reported  provides  for  internal 
revenue  taxes  exclusively. 

These  taxes  have  been  selected,  first,  because  we  have  the  machinery 
for  the  collection  of  them  now,  and  they  can  be  collected  with  but 
slight  additions  to  the  force  and  with  but  slight  increase  of  expense. 
We  have  selected  them  also  because  they  were  a  source  of  revenue 
successfully  seized  upon  during  the  civil  war,  and  because  they  are 
taxes  either  upon  articles  of  voluntary  consumption  or  upon  objects 
where  the  tax  will  be  paid  by  those  who  are  ordinarily  able  to  pay 
them ;  and  we  have  refrained  from  putting  a  tax  in  a  direction  where  it 
would  be  purely  upon  consumption,  unless  the  consumption  was  of  an 
article  of  voluntary  consumption,  so  that  the  consumer  might  regulate 
his  own  tax,  following  what  is  the  accepted  rule  of  taxation  in  all 
countries,  with  a  view  of  imposing  the  least  burden  and  disturbing  the 
business  of  the  country  as  little  as  possible." 

Briefly  summarized  the  aim  of  the  bill  was  to  obtain  the 
money  needed  as  quickly  as  possible.  The  question  of  the 
equal  distribution  of  the  burden  among  the  people  was  not 

*  Introduced  in  the  House,  April  25,  1898 ;  passed  April  29,  by  a  vote  of  181  to  131. 
Reported  by  the  Senate  Finance  Committee,  much  amended,  May  12.  Passed  the 
Senate,  June  4,  by  a  vote  of  48  to  28.  Conferees'  report  agreed  to  in  the  House,  June 
9,  and  in  the  Senate,  June  10.  Signed  by  the  President,  June  13.  Went  into  effect  the 
next  day,  except  where,  in  some  eases,  July  1  was  specified. 


OUR  FINANCES  IN  THE  SPANISH  WAR.  437 

raised.  The  revenue  bill  was  strictly  an  emergency  measure. 
Although  the  Senators  showed  a  tendency  to  spin  fine 
theories  in  regard  to  the  operation  of  certain  taxes,  yet  the 
equality  of  the  system  as  a  whole  was  not  considered. 
Senator  Allison  said  of  it: 

"In  the  first  place,  this  bill  is  here  only  because  the  Government  of 
the  United  States  is  involved  in  a  war  with  a  foreign  country.  If 
there  were  no  war,  there  would  be  no  necessity  for  this  bill;  and 
therefore  it  may  be  truly  called,  what  it  is  denominated,  a  war 
measure." 

It  is  not  perhaps  surprising,  then,  that  the  bill  which  was 
framed  in  this  spirit  contains  a  heterogeneous  collection  of 
taxes.  It  does  not  cull  the  fruit  systematically  from  the 
orchard  of  industry,  but  plucks  only  a  part  of  that  which 
is  most  easily  reached.  The  bill  does  not  establish  a  system 
of  taxation,  but  a  group  of  taxes  which  absolutely  defies 
classification. 

We  may  study  the  war- re  venue  bill  under  the  following 
divisions:  (1)  Taxes  already  in  use,  the  rates  of  which 
have  been  raised.  (2)  New  excise  taxes.  (3)  New 
business  and  corporation  taxes.  (4)  Transaction  taxes 
and  business  taxes  in  the  form  of  stamp  taxes  on  business 
documents.  (5)  Miscellaneous  taxes. 

Of  the  three  groups  of  internal  taxes  in  use  at  the 
time  the  revenue  bill  was  presented,  one,  namely,  that 
consisting  of  taxes  on  spirits  was  left  untouched.  The 
rates  imposed  on  the  other  two  were  doubled  with  the 
exception  that  the  special  taxes  on  dealers  in  beer  and  on 
brewers  were  left  unchanged.* 

The  tax  imposed  on  dealers  in  tobacco  prior  to  1890 
was  restored.  The  restoration  of  the  tax  on  dealers  in 
tobacco  was  regarded  partly  as  a  measure  to  enable  the 
officers  better  to  enforce  the  law  in  regard  to  the  taxation 
of  tobacco  and  cigars.  No  explanation  was  advanced  dur- 
ing the  discussion  of  the  bill  in  Congress  for  not  raising 

*  Tax  on  beer,  ale,  and  porter,  increased  from  $1  to  $2  a  barrel,  discount  seven  and 
one-half  per  cent.  Tax  on  tobacco  and  snuff,  twelve  cents  a  pound;  cigars  and  cigar- 
ettes, over  three  pounds  per  1000,  $3.60  per  1000;  of  less  weight,  cigars,  $1,  cigarettes, 
$1.50. 


438  UNIVERSITY  CHRONICLE. 

the  rates  on  spirits.  Had  that  class  of  goods  been  treated 
as  beer  and  tobacco  were  treated,  no  other  taxes  would 
have  been  necessarj-.  With  the  improved  methods  of 
administration  now  in  use  there  could  be  no  reason  to  fear 
the  wholesale  evasions  which  vitiated  the  attempt  to  levy 
high  rates  upon  spirits  during  the  civil  war.  If,  as  was 
suggested  in  the  last  lecture,  tea  and  coffee  had  both  been 
made  to  contribute,  and  as  now  suggested,  spirits  had  been 
treated  as  beer  and  tobacco  were,  we  should  have  had 
ample  revenues  with  the  least  possible  additional  cost. 
The  amounts  would  have  been : 

Tea $  10,000,000 

Coffee 70,000,000 

Spirits 80,000,000 

Beer 30,000,000 

Tobacco 30,000,000 

Total $220,000,000 

This  is  $70,000,000  more  than  the  new  taxes  which 
were  imposed  yield,  so  that  the  additional  rates  need  have 
been  but  two-thirds  of  the  increase  suggested.  Indeed,  an 
increase  of  half  the  amount  suggested  in  the  taxes  on  tea, 
coffees,  spirits,  beer,  and  tobacco  would  have  furnished 
over  $100,000,000,  or  more  than  the  amount  which  the 
House  Committee  on  Ways  and  Means  thought  necessary 
to  raise  by  taxation.  It  is  needless  to  say  that  such 
taxation  would  have  been  very  much  more  easily  borne  by 
the  people  than  the  multitude  of  new  taxes  imposed.  Had 
that  plan  been  followed  there  would  have  been  few  of  us  who 
would  know  by  actual  experience  that  we  were  paying  the 
expenses  of  a  war. 

New  excise  taxes  to  be  collected  by  the  use  of  stamps 
were  imppsed  on  patent  and  proprietary  medicines  and 
toilet  articles,  on  chewing  gum,  and  on  wine.* 

*  MEDICINES  AND  TOILET  ARTICLES. 

Retail  Price  of  Packages.  Stamp. 

1  to  5  cents i  of  1  cent 

5  to  10  cents i  of  1  cent 

10  to  15  cents §  of  1  cent 

15  to  25  cents f  of  1  cent 

For  each  additional  25  cents I  of  1  cent 

Chewing  gum,  4  cents  for  each  package  of  not  more  than  $1  in  retail  price  and  4 
cents  for  each  additional  $1  in  retail  price,  or  fraction  thereof. 

Wine,  per  bottle  of  one  pint  or  less,  1  cent;  per  bottle  of  over  one  pint,  2  cents. 


OUR  FINANCES  IN  THE  SPANISH  WAR.  439 

Little  can  be  said  in  favor  of  these  taxes;  they  strike 
a  vast  variety  of  different  articles  of  consumption  and  their 
effect  is  anything  but  uniform.  Consumption  is  a  very 
poor  basis  for  taxation.  The  rates  are  so  moderate,  how- 
ever, that  there  is  little  temptation  to  shift  the  taxes  and 
the  articles  taxed  are  in  many  instances  monopoly  products, 
the  prices  of  which,  it  may  be  assumed,  are  already  as  high 
as  they  can  be  made  without  decreasing  the  sales.  In  some 
instances,  therefore,  these  are  not  taxes  on  consumption 
but  taxes  on  the  profits  of  monopoly  businesses.  There 
has,  indeed,  been  no  general  tendency  to  increase  the  prices 
of  these  articles.  To  be  sure  the  imposition  of  the  tax  has 
checked  the  tendency  to  cut  rates  and  to  that  extent  may  be 
said  to  have  raised  the  prices  of  some  articles  widely 
regarded  as  necessities,  but  that  effect  will  be  only  tempor- 
ary. While,  therefore,  these  new  excise  taxes  have  not 
added  a  very  desirable  element  to  our  tax  system,  they  are 
not  seriously  harmful. 

The  new  business  taxes  are  of  two  classes.  The  first 
are  those  laid  on  bankers,  brokers,  museums  and  concert 
halls,  circuses  and  other  public  exhibitions,  bowling-alleys 
and  billiard  and  pool  rooms.*  The  second  are  those  on 
refiners  of  petroleum  and  sugar  and  on  pipe  line  companies. 

In  the  first  of  these  classes  the  most  serious  difficulties 
that  have  arisen  are  clearly  revealed  in  connection  with  the 
application  of  the  law  to  foreign  banks.  The  law  makes  no 
special  provision  for  them  and  they  do  not  come  properly 
under  the  general  provisions.  Strictly  speaking  a  branch 
of  a  foreign  bank  doing  business  in  this  country  has  no 
capital  located  here.  Such  banks  would,  therefore,  pay  but 
$50,  the  minimum  tax  which  all  bankers  must  pay.  But  as 
these  houses  often  do  a  vast  business  such  a  tax  would  be 
obviously  unfair.  The  law  of  1864  which  was  partly  copied 
in  the  new  law  was  much  more  explicit.  It  provided  a 

*  Bankers,  $50  a  year  and  $2  for  each  $1,000  over  $25,000  of  capital;  brokers,  $50; 
pawnbrokers  and  commercial  brokers,  $20 ;  custom-house  brokers,  $10 ;  theaters,  etc., 
$100;  circuses,  $100  for  each  State  in  which  they  do  business;  bowling-alleys,  etc.,  $5 
for  each  alley  or  table. 


440  UNIVERSITY  CHRONICLE. 

method  for  determining  the  capital  of  branch  banks.  The 
total  capital  of  the  bank  was  to  be  apportioned  among  the 
different  branches  according  to  the  amount  of  the  business 
done  by  each.  This  method  was  applied  to  foreign  banks. 
That  old  law,  however,  laid  a  tax  on  deposits,  dividends, 
and  profits  as  well  as  upon  capital,  so  that  the  burden  fell 
with  greater  equality  upon  all  the  banks.  While  the 
inequality  of  this  tax  is  best  revealed  by  the  difficulty  of 
applying  the  law  to  foreign  banks,  it  also  arises  in  every 
other  case.  The  amount  of  capital  used  is  never  commen- 
surate with  the  business  done,  nor  with  the  ability  of  the 
bank  to  contribute.  There  are,  for  example,  fifteen  com- 
mercial banks  in  San  Francisco.  In  one  of  these  the 
capital  is  nineteen  per  cent,  of  the  business  being  done,  as 
measured  by  the  total  assets  and  liabilities ;  in  another  it  is 
seventy-nine  per  cent.  Although  the  total  assets  and 
liabilities  are  only  an  approximate  measure  of  the  bank's 
ability  to  pay,  yet  this  comparison  shows  that  the  new  tax 
is  many  times  as  heavy  on  the  second  bank  as  on  the  first. 
Generally  speaking  the  smaller  the  bank  the  heavier  this 
tax  is  likely  to  be.  The  same  inequality  pervades  the  other 
special  business  taxes.  A  small  theater  or  a  small  circus 
pays  the  same  tax  as  a  large  one.  Probably  some  of  the 
smaller  ones  will  be  driven  out  of  business.  Possibly, 
however,  this  is  riot  a  result  to  be  deplored.  This  whole 
group  of  taxes  seems  to  have  been  snatched  indiscriminately 
from  the  system  of  internal  taxes  which  were  developed 
during  the  civil  war.  The  old  system  was  by  no  means  a 
complete  or  a  just  one,  and  the  scattered  sections  adopted  in 
the  new  law  form  far  less  of  a  system. 

The  tax  on  refiners  of  petroleum  or  sugar  and  on  pipe- 
line companies  which  was  placed  at  one-quarter  of  one  per 
cent,  on  the  excess  of  gross  receipts  above  $250,000  a  year 
is  the  remnant  of  a  tax  on  the  gross  receipts  of  nearly  all 
corporations  which  was  proposed  by  the  majority  of  the 
Senate  Committee  on  Finance.  The  Republican  minority 
of  that  committee,  however,  objected  to  such  a  sweeping 


OUR  FINANCES  IN  THE  SPANISH  WAR.  441 

tax,  first,  on  the  ground  that  it  would  burden  many  com- 
modities several  times  over,  and  second,  on  the  ground 
that  many  corporations,  and  especially  the  smaller  ones, 
had  to  compete  with  unincorporated  business  houses  and 
firms,  and  that  the  latter  would  be  given  an  advantage.  It 
was  urged  during  the  discussion  that  the  tendency  to  form 
corporations  was  a  public  calamity,  and  should  be  checked 
by  this  form  of  taxation.  A  tax  on  the  gross  receipts  of 
railroads,  bridges,  canals,  express  companies,  ferries, 
lotteries,  ships,  barges,  stages,  steamboats,  and  telegraph 
and  insurance  companies  had  been  used  with  great  success 
during  the  civil  war.  It  was  proposed  to  renew  this  tax  and 
to  extend  it  to  all  corporations  in  spite  of  the  fact  that  many 
of  them  were  heavily  taxed  by  other  parts  of  the  law. 
There  were  very  large  elements  of  injustice  in  the  proposed 
tax,  and  the  only  argument  advanced  in  favor  of  retaining 
the  tax  on  the  oil  and  sugar  trust  was  that  they  were 
monopolies.  The  tax  is  not  severe.  It  will  not  be  above 
one  and  one-quarter  cents  per  hundred  pounds  of  sugar  nor 
above  one  and  one- half  cents  per  hundred  gallons  of  oil  at 
the  prevailing  wholesale  rates,  so  that  there  will  be  little 
temptation  to  shift  the  tax  even  if  the  companies  would  not 
lose  more  by  reduced  sales  from  an  attempt  to  raise  prices 
than  they  would  gain  by  shifting  the  tax.  There  is  little 
likelihood  that  the  tax  will  affect  retail  prices. 

A  very  large  number  of  transaction  taxes  and  of  busi- 
ness taxes  was  levied  in  the  form  of  stamp  taxes  on 
business  documents  and  on  the  means  of  communication. 
These  taxes  are  usually  known  as  stamp  taxes,  but  the 
name  indicates  merely  the  means  of  collection  and  shows 
nothing  of  the  nature  of  the  tax.  In  general  these  taxes 
are  based  upon  a  recognition  of  the  fact  that  when  wealth 
is  transferred  from  one  person  to  another  its  existence  is 
manifested  and  a  convenient  moment  occurs  for  the 
imposition  of  a  tax.  When  such  a  transfer  is  accompanied 
by  a  document  which  is  legal  evidence  of  the  title  of  the 
new  owner  it  is  easy  for  the  government  to  refuse  legal 


442  UNIVERSITY  CHRONICLE. 

recognition  to  such  a  document  unless  accompanied  by  the 
evidence  that  the  tax  has  been  paid.  It  is,  therefore,  practi- 
cally impossible  to  evade  such  a  tax.  The  most  convenient 
way  of  collecting  these  taxes  is  by  the  sale  of  stamps  which 
are  to  be  attached  to  the  documents  as  evidence  of  pay- 
ment. There  are  two  features  of  these  taxes  which 
commend  them  as  emergency  taxes.  In  the  first  place, 
even  at  a  low  rate  they  can  be  made  to  yield  a  considerable 
income,  and  the  return  is  a  quick  one,  as  large  the  first 
month  as  at  any  time  afterward.  In  the  second  place  they 
are  very  inexpensive  to  administer:  the  taxpayer  himself 
acts  as  tax-collector  and  when  he  goes  to  the  office  to 
purchase  the  stamps  brings  in  the  revenue.  He  cannot 
omit  to  pay  his  tax  lest  his  document  prove  illegal.  During 
the  civil  war  and  for  many  years  afterward  stamp  taxes  of 
this  sort  were  in  use.  Many  of  the  provisions  of  the  old 
law  were  transferred  to  the  new  law,  and  the  changes  and 
omissions  are  rarely  for  the  better. 

It  would  be  tedious  to  enumerate  all  the  transactions 
which  are  taxed  in  this  way,  nor  is  it  necessary,  as  I  can 
comment  on  but  few  of  them.  The  first  thing  that  strikes 
one  who  carefully  scans  the  long  schedules  of  these  taxes  is 
that  they  are  frightfully  unequal.  Only  here  and  there  are 
they  graded  according  to  the  value  of  the  thing  taxed. 
Thus  the  tax  on  the  issue  of  corporation  stocks  is  five  cents 
on  each  $100  of  the  par  value,  and  on  the  transfer  of  a 
stock  is  two  cents  on  each  $100  of  the  par  value.  But  the 
par  value  of  a  stock  is  a  perfectly  arbitrary  thing,  a  mere 
name.  It  is  usually  $100,  but  the  true  value  may  be  any- 
where from  one  cent  to  $1,000  or  over,  according  to  the 
success  of  the  enterprise.  So,  too,  with  checks  and  drafts; 
whatever  the  value  may  be,  the  tax  is  always  two  cents. 
Indeed,  in  this  particular  case  the  form  of  the  tax  defeats 
its  end  as  a  revenue  measure,  for  it  has  simply  resulted  in 
the  writing  of  fewer  and  of  larger  checks,  and  more  has 
been  lost  to  the  postal  revenues  through  less  frequent 
remittances  than  has  been  gained  from  the  tax  on  checks. 


OUR  FINANCES  IN  THE  SPANISH  WAR.  443 

All  of  that  part  of  the  law  which  deals  with  drafts  and 
bills  of  exchange  is  so  faultily  drawn  as  to  be  practically 
unintelligible.  The  technical  terms  of  banking  are  used  in 
strange  and  unusual  senses,  and  totally  incongruous  things, 
such,  for  example,  as  inland  bills  of  exchange  and  certifi- 
cates of  deposit  bearing  interest  are  grouped  together. 
These  provisions  should  have  been  drawn  by  a  practical 
banker.  Had  the  new  tax  law  not  been  supported  by  that 
patriotic  sentiment  which  so  largely  aided  its  enforcement, 
this  particular  part  of  the  law  would  have  given  rise  to 
more  law  suits  than  revenue. 

Included  under  the  stamp  taxes  are  certain  taxes 
directed  more  or  less  vaguely  at  certain  classes  of  corpora- 
tions. These  are  the  taxes  on  freight  bills,  express  receipts, 
parlor  and  sleeping  car  tickets,  telegrams  and  telephone 
messages,  and  passage  tickets  to  foreign  countries.  The 
rates  on  the  last  are  graded  according  to  value,  but  on  all 
the  others  are  uniform  at  one  cent  each,  except  that  no  tax 
falls  on  telephone  messages  below  fifteen  cents.  The  tax 
on  telephone  messages  is  not  collected  by  stamps.  It  is 
easy  to  see  that  this  is  a  most  unequal  system.  There  has 
been  much  discussion  as  to  whether  it  was  the  intention  of 
the  law  that  the  stamp  should  be  furnished  by  the  com- 
panies or  by  their  patrons.  This  is  really  a  matter  of  little 
moment.  In  some  cases  the  tax  is  so  slight  as  to  be 
entirely  immaterial.  In  such  cases  the  companies  have 
furnished  the  stamps  themselves  to  save  their  patrons  any 
annoyance,  and  have  not  changed  their  rates.  In  other 
cases  the  tax  is  so  severe  that  if  the  companies  furnish  the 
stamps  they  will  be  obliged  to  shift  the  tax  by  raising  their 
rates,  in  order  to  live.  If  the  tax  were  paid  by  the 
express  companies  it  would  vary  from  four  per  cent,  of  the 
gross  receipts  down  to  practically  nothing.  For  doing  a 
twenty-five-cent  errand  the  express  company  would  pay  one 
cent,  and  no  more  for  a  shipment  of  $1,000,000  in  gold. 
The  express  companies  have  asserted  that  if  they  have  to 
pay  the  tax  it  will  take  half  of  their  profits.  The  tax  is 


444  UNIVERSITY  CHRONICLE. 

also  very  severe  on  telegrams.  The  average  telegram,  it 
has  been  estimated,  costs  24.3  cents  and  the  average  profit 
is  six  cents,  of  which  the  tax  is  16|  per  cent.  Whatever 
may  have  been  the  intention  of  the  law  as  to  who  should 
furnish  the  stamp  in  such  cases,  it  is  clear  that  the  tax  will 
be  shifted  to  the  patron  of  the  company.  If  it  is  finally 
decided  that  the  company  must  furnish  the  stamp,  then  the 
rates  will  have  to  be  raised,  and  the  patron  will  have  to  pay 
the  tax  just  as  much  as  if  he  furnished  the  stamp  himself. 
Taxes  which  appropriate  for  the  use  of  the  government 
from  ten  per  cent,  to  fifty  per  cent,  of  the  net  profits  of  any 
business  are  bound  to  be  shifted.  Still  the  companies 
cannot  escape  considerable  loss  even  by  shifting  the  tax. 
If  they  raise  the  rates  in  order  to  cover  the  tax  their  busi- 
ness will  fall  off,  while  the  expense  of  doing  it  will  not 
decrease  in  like  measure.  If  they  could  raise  their  rates 
without  loss  of  business  there  is  every  reason  to  suppose 
they  would  do  so,  tax  or  no  tax.  On  the  other  hand  the 
public  is  the  loser  as  well  as  the  companies.  In  the  first 
place  it  is  obliged  to  pay  the  tax,  or  at  least  a  part  of  it, 
and  in  the  second  place  it  is  obliged  by  the  increased  cost  to 
curtail  its  use  of  the  facilities  which  the  companies  furnish. 
When  taxation  approaches  confiscation  it  strikes  directly  at 
the  welfare  of  the  whole  people. 

It  is  a  curious  commentary  on  the  hasty  character  of  this 
legislation  that  the  tax  on  those  corporations  against  which 
no  little  hostility  was  expressed  in  Congress  should  be  only 
a  quarter  of  one  per  cent,  of  the  gross  receipts;  while  on 
businesses  against  which  nothing  in  particular  was  said  the 
tax  is  nearly  sixteen  times  as  heavy,  or  nearly  four  per  cent, 
of  the  gross  receipts. 

Among  the  miscellaneous  taxes  the  most  interesting  is 
the  inheritance  tax.  The  House  bill  had  proposed  certain 
stamp  taxes  on  probates  of  wills  and  letters  of  administra- 
tion. This  was  rejected  by  the  Senate  Committee  which 
substituted  the  tax  that  was  finally  adopted.  Inheritance 
taxes  have  been  growing  in  favor  in  this  country,  as  indeed 


OUR  FINANCES  IN  THE  SPANISH  WAR.  445 

they  have  in  all  parts  of  the  civilized  world.  During  the  last 
fifteen  years  they  have  been  introduced  in  many  of  our 
States.  The  federal  inheritance  tax  falls  on  legacies  or 
successions  of  personal  property  only.  It  falls  only  on 
estates  in  which  the  personal  property  exceeds  $10,000. 
The  rate  is  progressive  in  two  ways.  It  rises  from  three- 
quarters  of  one  per  cent,  on  direct  heirs  to  five  per  cent,  on 
distant  relatives  and  strangers  in  blood,  and  these  rates 
increase  as  the  estates  increase  in  size,  from  an  addition  of 
one-half  on  estates  between  $25,000  and  $100,000,  to  three- 
fold for  estates  over  $1,000,000.  In  the  event  of  a  legacy 
passing  to  a  distant  relative  or  to  a  stranger  in  blood,  from 
an  estate  of  over  $1,000,000  in  personal  property,  the  rate 
is,  therefore,  fifteen  per  cent.  The  surviving  husband  or 
wife  is  exempt.  A  similar  tax  was  used  during  the  civil 
war,  but  the  rates  were  not  so  sharply  progressive. 

The  main  justification  of  inheritance  taxes  is  found  in 
the  sudden  increase  in  the  ability  of  the  recipient  to  con- 
tribute. Theoretically  there  is  no  serious  objection  to  the 
tax  or  to  its  rates  and  general  arrangements;  except  that 
the  rates  should  have  varied  with  the  size  of  the  legacy 
rather  than  with  the  size  of  the  estate.  There  is  no  good 
reason  why  a  man  who  receives  $1,000  from  the  $1,000,000 
estate  of  some  distant  relative  should  pay  $150  when  the 
man  who  receives  the  same  amount  from  the  $10,000  estate 
of  a  similar  distant  relative  or  stranger  should  pay  only 
$50.  The  size  of  the  inheritance,  not  the  size  of  the  estate 
from  which  it  comes,  is  the  important  thing.  It  is  likely 
to  prove  very  difficult  to  prevent  evasions,  especially  as  the 
tax  falls  solely  on  personal  property;  and  the  high  rates 
offer  a  large  reward  for  concealment.  Our  experience 
with  the  civil  war  inheritance  tax  is  not  reassuring  in  this 
respect;  although  the  receipts  from  that  tax  did  increase 
from  only  about  four  per  cent,  of  what  they  should  have 
been  in  1866  to  nearly  fifty  per  cent,  of  what  they  should 
have  been  in  1870.  It  is  so  easy  to  conceal  personal 
property  that  if  persons  are  inclined  to  evade  the  tax  they 


446  UNIVERSITY  CHRONICLE. 

can  do  so.  A  minor  objection  to  this  tax  and  one  that 
should  be  remedied  at  the  next  session  of  Congress  is  that 
no  exemption  is  made  in  favor  of  legacies  to  benevolent  or 
educational  institutions,  which  as  the  law  now  stands  must 
pay  the  highest  rates.  Another  objection  is  that  many  of 
the  states  now  levy  inheritance  taxes,  and  in  many  instances 
the  double  burden  will  be  very  severe. 

There  is  one  very  interesting  point  which  should  be 
considered  in  connection  with  some  of  these  taxes.  In 
spite  of  the  fact  that  most  of  them  were  chosen  from  the 
list  of  those  taxes  which  had  been  used  during  the  civil  war 
period  and  that,  in  their  older  form,  they  had  been  passed 
upon  by  the  Supreme  Court,  there  is  more  than  a  doubt  as 
to  the  constitutionality  of  some  of  them  at  the  present 
time.  All  of  the  decisions  which  confirmed  the  constitu- 
tionality of  the  particular  taxes  in  question  rest  upon  the 
same  ground  as  that  which  ratified  the  income  tax  of  the 
civil  war.  But  the  ground  for  the  whole  series  of  these 
decisions  has  been  entirely  removed  by  the  recent  decision 
of  the  Supreme  Court  in  regard  to  the  validity  of  the  income 
tax  of  1894.  Briefly  stated,  the  previous  decisions  in 
regard  to  such  taxes  asserted  that  taxes  on  the  ownership 
or  the  enjoyment  of  property  were  not  direct  taxes  within 
the  meaning  of  the  constitution.  But  in  the  now  famous 
case  of  Pollock  vs.  the  Farmers'  Loan  and  Trust  Company, 
which  turned  upon  the  constitutionality  of  the  income  tax 
of  1894,  the  Supreme  Court  held  that  a  tax  "imposed 
merely  because  of  ownership"  was  just  as  much  a  direct  tax 
as  one  imposed  on  the  property.  In  the  light  of  this 
decision,  if  an  income  tax  is  a  direct  tax,  then  an  inheri- 
tance or  successions  tax  is  a  direct  tax  and  as  such  is 
unconstitutional;  so  too  is  the  tax  on  the  capital  of  banks, 
and  that  on  the  gross  receipts  of  oil  arid  sugar  refineries. 
It  might  be  urged  that  the  tax  on  bankers  is  akin  to  a 
license  and,  therefore,  does  not  come  under  the  decision 
in  point.  But  the  wording  of  the  act  does  not  countenance 
any  such  interpretation.  According  to  the  law  it  is  the 


OUR  FINANCES  IN  THE  SPANISH  WAR.  447 

fact  that  the  banker  uses  or  employs  a  certain  amount  of 
capital  that  determines  his  tax.  The  rest  of  the  special 
taxes,  those  on  brokers,  etc.,  are  not  on  their  property  but 
on  their  business  and  do  not  come  under  this  decision. 

But  there  was  another  point  decided  in  this  same  famous 
case,  according  to  which  these  three  taxes  are  unconstitu- 
tional, even  if  they  are  not  direct  taxes.  It  was  held  that, 
even  if  the  income  tax  of  1894  was  not  a  direct  tax  within 
the  meaning  of  the  constitution,  it  was  still  unconstitutional 
because  it  violated  that  section  of  the  constitution  which 
requires  that  "all  Duties,  Imposts,  and  Excises  shall  be 
uniform  throughout  the  United  States,"  because  it  did  not 
fall  equally  upon  all  incomes.  That  is  because  a  deduction 
of  $4,000  was  allowed  to  be  made  from  some  incomes  and 
not  from  others.  If  the  income  tax  of  1894  was  not 
uniform,  what  is  to  be  said  of  the  new  inheritance  tax, 
which  exempts  all  successions  from  estates  below  $10,000 
and  whose  rates  vary  from  three-quarters  of  one  per  cent, 
to  fifteen  per  cent,  upon  exactly  the  same  amounts  of 
property?  If  the  income  tax  of  1894  was  unconstitutional 
because  it  did  not  allow  corporations  to  make  the  same 
deduction  that  was  allowed  to  individuals,  what  is  the 
character  of  a  tax  which  is  many  times  as  heavy  on  one 
bank  as  on  another,  or  of  a  tax  on  one  small  group  of  cor- 
porations which  lets  all  others  go  free!  There  was  no 
attempt  or  intention  to  make  these  taxes  uniform ;  and  if  the 
interpretation  given  to  that  term  in  the  recent  income  tax 
decision  is  to  hold,  these  taxes  are  unconstitutional.  That 
decision  was  far  more  sweeping  in  its  limitation  of  the 
power  of  Congress  to  lay  taxes  than  any  other  that  has  been 
handed  down  during  the  century.  By  disregarding  the  long 
recognised  principle  of  stare  decisis  in  regard  to  the  income 
tax  the  court  overthrew  almost  every  precedent  in  regard  to 
taxation  by  which  Congress  has  been  guided.  It  seems, 
however,  much  more  probable  that  the  old  principles  will  be 
reasserted  and  the  decision  regarding  the  income  tax  reversed 
than  that  these  taxes  will  be  declared  unconstitutional. 


448  UNIVERSITY  CHRONICLE. 

Among  the  miscellaneous  taxes  there  was  also  inserted 
one  upon  mixed  or  adulterated  flour.  The  imposition  of 
this  tax  is  not  mainly  for  revenue.  It  is  for  the  purpose  of 
regulation  and  to  protect  the  public  from  unknowingly 
using  inferior  flour.  On  oleomargarine  there  is  a  similar 
tax  that  has  been  in  use  for  some  time.  It  was  asserted  in 
Congress  that  as  much  as  seventy-five  or  eighty  per  cent,  of 
all  flour  sold  is  adulterated  by  the  use  of  ground  clay, 
ground  rock,  "mineraline,"  or  corn  flour  bleached  by 
sulphuric  acid.  It  is  not  claimed  that  all  of  the  articles 
used  for  the  adulteration  of  flour  are  injurious  to  health, 
but  some  of  them  are,  and  none  of  them  has  the  same 
value  for  nutrition  as  wheat  flour.  The  law  requires  these 
flours  to  be  properly  labeled  and  by  imposing  a  stamp 
tax  on  them  the  government  can  enforce  this  regulation. 
Without  such  a  tax  the  federal  government  would  not  be 
competent  to  invade  this  sphere  of  state  activities.  A 
number  of  penalties  are  imposed  for  failure  to  comply  with 
all  the  regulations.  From  now  on  it  will  be  dangerous 
for  any  person  to  sell  mixed  flour  under  the  guise  of  pure 
flour. 

The  general  system  of  taxation  imposed  by  this  law  is 
not  particularly  burdensome  as  a  whole.  In  some  instances 
individual  parts  of  the  system  run  very  close  to  confiscation, 
and  the  system  is  frightfully  unequal.  At  the  same  time 
most  of  the  unequal  taxes  can  be  wholly  or  partly  shifted 
and  the  severity  of  the  burden  is  thus  lightened  by 
diffusion.  The  inequality  and  injustice  of  the  system 
which  we  have  noted  all  through  the  law  is,  perhaps,  a 
necessary  feature  of  any  system  that  is  adopted  in  an 
emergency,  when  the  time  is  lacking  for  the  full  discussion 
of  a  logical  and  just  system.  It  emphasises  the  necessity, 
so  often  referred  to,  of  arranging  in  time  of  peace  a  just 
and  equitable  system  which  can  be  readily  expanded  in 
time  of  war.  During  a  war  no  nation  can  afford  the  luxury 
of  tax  reform  for  reform's  sake.  That  is  an  enjoyment 
which  belongs  to  times  of  peace. 


OUR  FINANCES  IN  THE  SPANISH  WAR.  449 

Considerable  comment  has  been  made  upon  the  fact 
that  the  bill  inaugurated  new  taxes  and  opened  new 
resources  but  left  many  better  sources  of  revenue  untouched. 
As  has  been  suggested  in  this  lecture,  it  would  have  been 
possible  without  the  inauguration  of  a  single  new  tax  to 
raise  all  of  the  revenue  needed.  But  whether  this  were  by 
design  or  by  accident  it  is  strictly  in  accord  with  the  best 
policy  for  the  financial  management  of  a  war.  In  the  first 
place,  as  a  political  measure,  it  is  justified  because  it  brings 
the  cost  of  war  very  forcibly  to  the  attention  of  the  people. 
But  in  accordance  with  the  principles  outlined  in  the  first 
lecture  it  is  of  the  utmost  importance  that  the  war  financier 
should  not  exhaust  his  resources  at  an  early  date.  All 
along  through  the  early  stages  of  the  war  his  aim  should 
be  to  multiply  resources  and  to  preserve  some  large  ones 
for  the  later  and  more  desperate  stages  of  the  conflict 
should  they  arrive.  Thus  it  is  wiser  to  initiate  new  taxes 
at  the  commencement  of  the  war,  which  will  grow  more  and 
more  productive  as  time  goes  on  than  to  draw  too  heavily 
upon  the  resources  afforded  by  the  existing  system  of 
taxation  unless  that  system  is  fairly  comprehensive  and 
equitable.  As  the  war  proceeds  it  becomes  more  and  more 
difficult  to  establish  new  taxes  and  their  yield  is  then  often 
dubious.  Unless  new  resources  are  opened  at  an  early  date 
they  may  never  be  available.  Then  again,  the  main 
purpose  of  taxation  in  time  of  war  is  to  sustain  the  nation's 
credit.  The  provision,  by  new  taxes,  of  revenues  for  con- 
ducting the  war  is  of  secondary  importance.  Much  strength 
comes  to  a  nation's  credit  from  the  reservation  of  obvious 
sources  of  revenue  for  future  uses.  In  spite  of  the  many 
faults  of  the  tax  system  imposed  by  the  new  law  when 
viewed  by  itself,  we  must  admit  that  as  a  war-revenue 
measure  it  was  a  brilliant  success.  It  will  be  judged  in  no 
other  light  if  it  is  promptly  abolished  at  the  end  of  the  war. 


450  UNIVERSITY  CHRONICLE. 


III.— READJUSTMENT  OF  THE  REVENUES. 

Although  the  war  is  over  we  cannot  yet  count  the  cost. 
Many  of  the  war  expenses  still  continue.  Some  of  the 
troops  have  been  discharged,  but  large  numbers  are  still  in 
the  ranks.  The  territories  we  have  conquered  must,  for 
the  present  at  least,  be  garrisoned.  These  garrisons  must 
be  maintained  until  a  final  settlement  is  reached  and  per- 
haps for  a  long  time  thereafter.  Even  after  the  terms  of 
peace  are  finally  settled  there  will  be  many  expenses  due  to 
the  war,  such  as  those  connected  with  the  return  of  the 
troops  to  their  homes.  It  is  highly  probable  that  the  new 
territories  we  have  acquired  will  be  a  source  of  expense  for 
many  years  to  come.  An  "imperial  policy"  demands 
imperial  revenues. 

Our  federal  system  of  taxation  has  for  years  been  falling 
into  disorder  and  will  not  readily  respond  to  new  demands. 
The  war  and  its  consequences  will  but  hasten  the  develop- 
ment of  changes  that  were  inevitable.  When  Congress 
meets  in  December  our  finances  must  be  rearranged  on  an 
entirely  new  basis.  Our  new  peace  revenues  must  be  larger 
than  those  we  had  before  the  war.  Judging  from  the 
present  temper  of  the  country,  we  shall  have  a  vastly  larger 
army  and  navy,  both  for  the  home  service  and  for  our 
colonies.  Eventually  Cuba,  Porto  Rico,  and  the  Philip- 
pines may  be  able  to  furnish  a  considerable  part,  if  not  all, 
of  the  revenues  needed  to  support  the  government  there. 
But  for  the  present,  at  least,  that  is  impossible.  In 
addition  to  the  expenses  connected  with  the  enlargement  of 
our  army  and  navy  and  the  government  of  our  new 
possessions  there  will  undoubtedly  be  many  new  expenses 
incidental  to  the  change  in  our  policy.  There  is  already  a 
strong  demand  for  government  aid  in  the  construction  of 
the  Nicaraguan  Canal.  Probably  there  will  also  be  demands 
for  subsidies  for  the  construction  of  a  Pacific  cable,  and  for 
shipping  to  follow  the  flag  into  new  commercial  fields. 


OUR  FINANCES  IN  THE  SPANISH  WAR.  451 

Many  estimates  have  been  made  of  the  probable  increase 
in  the  demands  upon  the  Treasury  after  the  war.  There  is 
no  safe  ground  for  such  estimates  and  they  are  most  of 
them  utterly  worthless.  But  although  we  cannot  at  the 
present  time  tell  anything  definite  about  the  amount  of  the 
probable  increase  in  our  needs,  yet  it  is  obvious  that  our 
old  peace  revenues  will  not  be  sufficient.  That  means  that 
the  new  taxes  must  be  continued  or  some  others  substituted 
for  them  which  will  add  to  the  revenues  we  have  been 
receiving  in  the  past.  How  the  increased  revenues  will  be 
obtained  becomes,  therefore,  a  question  of  much  importance. 

In  the  first  place,  the  principles  governing  the  fiscus 
during  a  war  are,  as  has  been  shown  in  the  other  lectures, 
very  different  from  those  which  guide  it  during  peace.  It 
is  practically  impossible  to  run  along  under  the  present 
arrangements.  Our  new  taxes  are  unequal  and  crude. 
They  were  adopted  in  an  emergency.  Better  and  far  more 
available  resources  were  left  untouched.  The  main  object 
of  the  financier  during  a  war  is  to  preserve  the  nation's 
credit,  and  to  that  end  he  should  reserve  some  of  his  best 
resources  for  the  time  of  greatest  stress.  Consequently  the 
first  emergency  taxes  are  not  apt  to  be  well  distributed. 
Fortunately  in  the  present  case  the  time  of  greatest  stress, 
for  which,  as  we  have  seen,  such  careful  preparation  was 
made,  never  came.  But  one  advantageous  result  of  the 
ample  provision  made  is  that  we  are  now  in  a  position  to 
deliberate  properly  on  the  new  system  which  is  to  be 
adopted.  We  have  funds  enough  on  hand  to  carry  us 
safely  and  comfortably  over  the  intervening  period.  If  the 
estimate  made  in  the  first  of  these  lectures  is  approximately 
correct,  there  will  be  a  surplus  fund  of  about  $100,000,000 
with  which  to  wind  up  the  expenses  of  the  war  and  to  start 
on  the  new  regime.  With  this  ample  surplus  we  should  be 
able  to  afford  the  luxury  of  a  thorough  tax  reform. 

Winding  up  the  expenses  of  a  war  is  not  an  easy 
process.  Ordinarily  government  accounts  are  so  carefully 
kept  and  every  receipt  and  expenditure  so  carefully  checked 


452  UNIVERSITY  CHRONICLE. 

that  the  exact  condition  of  each  department  can  at  any  time 
be  accurately  stated.  But  at  the  close  of  a  war  this 
model  condition  is  not  found.  During  the  progress  of  a 
war  the  public  accounts  usually  become  badly  involved. 
Thousands  of  men  have  been  granted  the  power  to  spend 
public  moneys.  This  spending  is  often  done  under  circum- 
stances which  do  not  admit  of  strict  control.  "Red-tape" 
must  be  cut,  not  unwound.  The  commissary  in  the  field 
must  get  supplies  as  best  he  can.  Unaudited  and  unsettled 
claims  accumulate,  which  cannot  be  investigated  until  some 
time  after  peace  has  been  declared.  Indeed,  there  are 
many  claims  that  do  not  reach  the  Treasury  for  a  long 
time.  At  the  close  of  the  civil  war  there  were  claims  of  this 
character  amounting  in  March,  1865,  to  about  $285,000,000. 
Most  of  these  claims  bear  interest  at  a  high  rate  and  must 
in  consequence  be  adjusted  as  soon  as  possible.  The  very 
first  care  of  the  financier  at  the  close  of  the  war  is  the 
adjustment  of  these  unsettled  claims. 

The  next  step  is,  in  most  cases,  the  conversion  of  the 
public  debt.  War  usually  weakens  public  credit  and  the 
borrowing  that  goes  on  is  not  often  on  the  most  favorable 
terms.  After  the  war  and  with  better  credit  it  is  usually 
possible  to  reduce  the  interest  charges.  For  the  reasons 
already  explained  our  credit  was  not  in  the  least  affected 
during  the  late  war,  and  as  the  war  was  of  short  duration 
there  are  no  debts  that  need  adjustment  or  admit  of  con- 
version. Fortunately,  therefore,  this  step  does  not  need 
consideration. 

These  two  things  attended  to,  it  is  possible  to  devote 
proper  attention  to  the  removal,  reduction,  or  readjustment 
of  the  war  taxes.  In  the  present  case,  for  the  reasons  just 
stated,  we  cannot  hope  for  much  decrease  in  the  sums 
required  by  the  government.  Readjustment  rather  than 
reduction  is  required.  The  new  taxes  imposed  for  the 
support  of  the  war  are  not  upon  sources  that  can  long  be 
drawn  upon  without  far-reaching  changes  in  our  industrial 
and  economic  conditions.  •  The  public  revenues  are  simply 


OUR  FINANCES  IN  THE  SPANISH  WAR.  453 

a  certain  part  of  the  wealth  produced  by  the  people,  drawn 
off  by  common  consent  to  be  devoted  to  the  accomplishment 
of  certain  common  ends.  If  more  is  drawn  from  the  wealth 
produced  by  any  given  industry  than  is  drawn  from  the 
others,  that  industry  tends  to  decline,  and  if  the  burden  is 
very  severe  the  industry  finally  passes  away  entirely. 
History  is  replete  with  instances  in  which  whole  classes  of 
the  population  have  been  ground  down  by  unjust  taxation, 
until  they  either  disappeared  as  a  class  or  saved  themselves 
only  by  revolution.  Taxes  need  not  be  severe  or  the 
amount  raised  excessive  to  establish  a  tendency  which  will 
eventually  bring  about  this  result.  They  need  only  to  be 
unequal.  One  of  the  most  potent  causes  of  the  failure  of 
agriculture  to  advance  in  this  country  as  other  industries 
have  advanced,  and  one  of  the  most  obvious  causes  of  the 
depopulation  of  the  rural  districts  is  unjust  and  unequal 
taxation.  The  taxes  paid  by  our  farmers  are  not  very 
severe  judged  by  the  standards  of  some  other  countries,  but 
so  long  as  the  farmer  has  to  pay  double  the  taxes  paid  by 
other  classes  of  the  population  the  agricultural  industries  of 
the  country  will  not  thrive. 

There  is  a  comforting  but  superficial  doctrine  held  by 
many  people  in  this  country  which  is  denied  by  the  plainest 
teachings  of  financial  history.  It  is  known  as  the  diffusion 
theory  of  taxation.  It  has  even  been  laid  down  as  a  general 
principle  that  "taxes  equate  and  diffuse  themselves,  and  if 
levied  with  certainty  and  uniformity  they  will,  by  a 
diffusion  and  repercussion,  reach  and  burden  all  property 
with  unerring  certainty  and  equality.  All  taxation  ulti- 
mately and  necessarily  falls  on  consumption."* 

Such  a  theory  as  this  may  do  to  blunt  the  conscience  of 
a  legislator  who  is  too  busy  "keeping  solid  with  his 
constituency"  to  devote  much  attention  to  the  bill  to 
provide  revenue  for  the  support  of  the  government. 
But  it  provides  little  consolation  to  those  who  cannot 


*  David  A.  Wells,  in  the  article  on  Taxation  in  Lalor's  Cyclopedia  of  Political 
Science. 


454  UNIVERSITY  CHRONICLE. 

keep  up  in  the  race  with  their  competitors  because  they 
are  obliged  to  carry  more  than  their  share  of  the  burden  of 
supporting  those  institutions  which  are  established  for  the 
benefit  of  all.  If  the  tax  on  banking  makes  that  business 
relatively  less  profitable  than  some  others,  capital  will 
inevitably  be  withdrawn  from  banking  and  directed  into 
other  channels.  This  process  will  proceed  until  the  supply 
of  capital  invested  in  banking  has  decreased,  as  compared 
with  the  demand,  sufficiently  to  enable  a  higher  profit  to  be 
commanded  by  that  which  remains.  So  far  as  the  capital 
remaining  in  this  business  is  concerned  the  tax  has  been 
shifted.  But  the  business  community  which  now  pays  the 
tax  is  also  deprived  of  its  accustomed  banking  facilities 
and  is  obliged  to  get  along  with  less  than  is  desirable. 

The  principle  involved  here  is  very  simple.  It  applies 
to  every  tax  which  is  not  general  in  its  application  but 
which  falls  upon  one  or  two  industries  only.  It  is 
reasonable  to  suppose  that  every  producer  or  seller  is  now 
getting  the  highest  price  he  possibly  can  for  his  wares,  or 
at  all  events  is  charging  that  price  which  in  the  long  run 
will  yield  him  the  largest  possible  profits.  If  a  tax  is  im- 
posed upon  one  commodity  while  others  are  free,  the  present 
producers  of  that  commodity  cannot  get  a  higher  price 
merely  because  they  wish  to  reimburse  themselves  for  the 
new  expenses  in  the  form  of  a  tax.  The  mere  imposition 
of  a  tax  on  this  one  commodity  does  not  increase  the 
demand  for  it  and  only  as  certain  producers  withdraw 
from  the  business  and  thus  decrease  the  supply  do  prices 
rise.  If  the  tax  is  shifted  in  the  form  of  higher  prices  by 
those  who  remain  in  the  business,  it  is  because  the  produc- 
tion of  the  commodity  in  question  has  been  curtailed. 
Those  who  remain  in  the  industry  get  the  average  rate  of 
profits.  But  there  has  been  a  more  or  less  important  trans- 
fer of  capital  and  labor  to  other  lines.  The  community  is 
not  altogether  so  well  off,  because  it  is  obliged  to  get  along 
with  less  of  the  commodity  in  question  than  it  has  been 
accustomed  to.  The  enjoyments,  or  the  well-being  of 


OUE  FINANCES  IN  THE  SPANISH  WAR.  455 

society,  are  thus  curtailed,  and  society  has  to  console  itself 
with  other  things  which  are  less  satisfactory.  Capital  has 
been  directed  into  channels  not  ordinarily  so  profitable 
which,  consequently,  are  not  so  valuable  to  the  com- 
munity. Then,  again,  among  the  consumers  to  whom  the 
tax  is  thus  partly  or  wholly  shifted  there  is  the  greatest 
variety  in  ability  to  contribute  to  the  support  of  the 
government.  The  tax  is,  therefore,  still  very  unfair.  Ex- 
penditure is  of  all  bases  for  taxation  the  least  equitable. 
Who  finally  bears  the  tax  is  of  no  immediate  concern  here. 
What  we  need  to  remember  is  simply  that  unequal  taxation 
changes  the  course  of  industry,  diverting  it  from  old  chan- 
nels and  directing  it  into  new  ones,  which  are  usually  less 
advantageous,  because  heretofore  less  successful  and  con- 
spicuous. And  when  taxation  is  directed  partly  by  jealousy 
and  envy  of  business  success  and  is  placed  upon  those 
enterprises  which  have  made  themselves  conspicuous  by 
their  success,  it  directs  industry  from  those  lines  in  which 
success  has  proved  the  necessity  of  enterprise  and  capital 
and  drives  it  into  lines  in  which  it  is  bound  to  be  less 
advantageous  to  the  community. 

As  was  shown  in  the  last  lectures,  the  new  war  taxes  fall 
very  unequally  upon  different  industries,  and  will  in  many 
instances  have  to  be  shifted  to  the  consumers,  if  the  taxed 
industries  are  to  live  at  all.  And  we  now  see  that  the  very 
process  of  shifting  drives  capital  and  industry  into  new  and 
less  advantageous  channels.  The  conclusion  is  obvious. 
We  cannot  and  should  not  attempt  to  continue  our  present 
taxes  longer  than  is  absolutely  necessary.  The  retention 
of  these  taxes  merely  because  they  yield  the  additional 
revenue  needed  is  anything  but  wise.  A  new  system,  just 
and  equal  in  its  operation,  is  absolutely  necessary. 

It  is  a  curious  historical  accident  that  our  federal 
government  has  never,  until  the  present  time,  been  obliged 
to  consider  seriously  what  constitutes  justice  and  equality 
in  taxation.  From  the  beginning  the  tariff  has  been  the 
leading  feature  in  our  national  finances.  At  first  resorted 


456  UNIVERSITY  CHRONICLE. 

to  in  an  emergency  as  a  revenue  measure,  it  has  been 
maintained  ever  since  for  political  reasons.  Except  under 
stress  of  war,  or  to  meet  the  expenses  occasioned  by  war, 
we  have  had  an  income  sufficient  to  meet  all  our  needs  from 
the  incidental  revenues  yielded  by  a  measure  intended 
primarily  to  encourage  home  industries  by  the  restriction  of 
importations  and  of  foreign  competition.  There  have  been 
but  five  years  in  our  entire  history  in  which  the  internal 
revenues  exceeded  the  customs  revenue  and  those  five  years 
were  1864  to  1868.  Since  the  main  portion  of  our  revenue 
system  has  been  dictated  more  by  political  than  by  financial 
reasons  and  purposes  we  have  not  gathered  any  useful 
precedents  which  can  guide  in  the  reform  necessary.  The 
problem  to  be  solved  has  never  presented  itself  to  our 
statesmen  before  this  in  any  form.  At  the  close  of  the  war 
of  1812,  we  entered  finally  upon  the  protective  policy  which 
with  scarcely  an  interruption  has  dominated  our  finances 
ever  since ;  at  the  close  of  the  civil  war  we  were  called  upon 
to  reduce  our  revenues  by  the  removal  of  the  larger  part  of 
that  heterogeneous  mass  of  incongruous  taxes  which  had 
been  levied  for  war  purposes.  At  the  close  of  the  Spanish 
war  we  have  a  similar  jumble  of  unjust  taxes,  which  we 
adopted  in  an  emergency  and  which  have  served  their  turn ; 
but  otherwise  the  conditions  confronting  us  are  entirely 
new.  After  the  war  of  1812  the  newly  espoused  protective 
system  promised  to  afford  sufficient  revenue  to  meet  the 
increased  expenditures.  In  1866  we  were  receiving  reven- 
ues far  in  excess  of  possible  needs  and  the  problem,  although 
complicated  by  other  factors,  was  mainly  one  of  reduction. 
But  in  1898  we  have  a  wretched  extempore  system  of 
internal  taxation,  one  of  the  many  heritages  of  our  lack  of 
preparation  for  war,  and  yet  we  cannot  dispense  with  the 
revenues  these  taxes  yield.-  The  question  is,  therefore, 
purely  one  of  tax  reform;  and  one  which  must  be  settled, 
so  far  at  least  as  the  internal  taxes  are  concerned,  solely  by 
financial  considerations. 

There  are  still  other  reasons  why  the  government  should 


Bancroft  Library 

OUR  FINANCES  IN  THE  SPANISH  WAE.  457 

turn  its  attention  seriously  to  the  problem  of  creating  a  new 
and  just  system  of  taxation.  The  revenue-yielding  power 
of  the  tariff  has  been  for  years  declining.  Whether  by 
reason  of  the  protection  afforded  by  the  tariff  or  because  of 
their  own  natural  strength  domestic  manufactures  have  so 
increased  that  foreign  supplies  are  less  necessary.  In  1897 
the  government  received  less  than  $6,600,000  from  iron 
imports  valued  at  about  $16,600,000,  while  in  1888  the  cus- 
toms revenue  from  iron  was  $20,600,000  and  the  imports 
which  paid  these  duties  were  valued  at  $50,600,000.  This  is, 
perhaps,  the  most  striking  example,  but  the  same  tendency 
can  be  observed  very  clearly  in  other  cases.  The  decay  of 
the  tariff  will  be  hastened  by  the  new  policy.  For  a  con- 
siderable part  of  the  dutiable  imports  which  really  afford  a 
revenue  comes  from  our  newly  acquired  colonies,  if  they  may 
be  so  regarded.  From  1892  to  1894  the  imports  from  these 
sources  amounted  to  ten  per  cent,  of  our  total  imports. 
But  the  revenues  which  these  imports  yield  constitute  a  far 
larger  percentage  of  all  the  revenues,  because  they  include 
some  of  the  best  revenue-yielding  articles,  such  as  sugar, 
tobacco,  and  hemp.  If  these  imports  are  all  to  be  admitted 
free  of  duty  there  will  be  a  large  decrease  in  our  customs 
revenues.  It  has  been  estimated  that  five- eighths  of  all  the 
sugar  imported  into  the  United  States  in  normal  years 
comes  from  our  new  acquisitions.  At  the  present  rates  this 
sugar  imported  would  yield,  perhaps,  $50,000,000  a  year  in 
revenue.  So  that  unless  we  continue  to  treat  our  colonies 
as  foreign  countries  we  shall  not  only  incur  increased 
expenses  for  their  government  but  lose  the  large  revenues 
now  obtained  from  the  duties  on  their  products.  Unless 
the  tariff  is  revised  from  a  fiscal  rather  than,  as  has  been 
the  case  in  the  past,  from  a  political  point  of  view,  it  must 
inevitably  surrender  its  place  as  the  main  source  of  revenue. 
The  principles  according  to  which  the  new  system  of 
taxation  should  be  arranged  are  simple  and  evident,  but 
their  application  will  be  most  difficult.  Taxation  should  be 
in  proportion  to  ability.  Each  man  should  contribute  to 


458  UNIVERSITY  CHRONICLE. 

the  common  good  according  as  he  is  able.  If  the  burden 
of  taxation  is  evenly  distributed  so  that  each  man's  load  is 
proportioned  to  his  strength,  it  is  easily  carried. 

But  in  the  application  of  these  simple,  self-evident 
principles  to  the  reform  of  federal  taxation  there  are  many 
difficulties.  In  the  first  place  the  federal  government  is 
debarred  by  an  unfortunate  interpretation  of  the  constitu- 
tion, from  using  that  form  of  taxation,  which  should  make 
the  backbone  of  any  correct  system.  That  is  direct  tax- 
ation. In  the  second  place  the  maxim  that  taxation  should 
be  in  proportion  to  ability  applies  to  the  system  as  a  whole, 
to  the  totality  of  taxes  paid  by  the  citizen,  and  not  to  any 
part  by  itself.  The  federal  government  is  not  the  only 
taxing  authority  in  the  land.  There  are  also  the  States 
and  their  different  local  divisons.  There  are  few  citizens 
who  do  not  pay  taxes  to  at  least  four  different  authorities, 
the  federal,  the  state,  the  county,  and  the  city  or  town 
governments,  and  in  some  cases  eight  or  more  different 
authorities  may  attack  the  same  unfortunate  individual 
with  their  tax  bills.  To  establish  an  equitable  system 
under  such  conditions  requires  a  sharp  definition  of  the 
field  of  action  for  each  different  authority.  Fortunately  we 
have  such  a  division  practically  established  by  law  and 
custom.  In  a  general  way  the  States  cannot  levy  indirect 
taxes,  nor  the  federal  government  direct  taxes  except  by 
apportionment,  and  that  is  so  obviously  and  wickedly 
unjust  as  to  be  excluded.  It  is  foreign  to  my  present 
purpose  to  discuss  the  division  of  the  field  between  the 
State  and  its  local  divisions.  But  although  the  federal 
government  is  confined  to  indirect  taxes  there  is  danger 
that  these  taxes  may  draw  from  the  same  sources  that  the 
state  taxes  draw  from.  The  States  may  tax  the  property 
or  the  income  it  yields  directly  and  the  federal  government 
may  lay  an  indirect  tax  upon  the  same  wealth  in  process  of 
transfer  or  acquisition. 

A  third  group  of  difficulties  besets  the  establishment  of 
a  new  and  equitable  system  of  taxation  for  the  federal 


OUR  FINANCES  IN  THE  SPANISH  WAR.  459 

government.  These  are  political  in  character.  A  strong 
political  party  insists  upon  the  continued  recognition  of  the 
political  features  of  the  tariff.  Protection  must  be  main- 
tained and  any  revision  of  the  tariff  for  fiscal  purposes 
must  not  interfere  with  that.  It  would  be  useless  to  discuss 
any  plan  which  did  not  allow  for  this  fact,  and  it  is  equally 
useless  to  discuss  the  advisability  of  protection,  for  that  is 
now  the  settled  policy.  If  for  revenue  purposes  a  tax  is 
placed  on  the  raw  materials  required  in  any  protected 
industry  compensatory  duties  must  be  added  to  the  duties 
on  the  manufactured  products.  These  difficulties  are  too 
familiar  to  need  any  explanation  here.  Other  forces  in  the 
political  field  make  for  the  use  of  the  taxing  power  for 
purposes  other  than  revenue.  It  is  so  easy  to  make  political 
capital  by  placing  destructive  taxes  on  the  "money  power," 
on  "Wall  Street,"  on  corporations  and  trusts,  etc.,  that 
when  it  is  proposed  to  make  these  elements  bear  their  fair 
share  of  the  burden  of  supporting  the  government  under 
which  they  thrive,  voices  are  sure  to  be  heard  demanding 
that  the  burden  be  greater  on  these  than  on  any  other 
elements.  When  behind  this  cry  there  is  the  threat  of  a 
new  sectionalism,  these  voices  become  extremely  powerful. 

But  this  third  group  of  difficulties  is  not  new,  nor  is  it 
peculiar  to  our  own  country  or  time,  except  in  its  specific 
manifestations.  In  all  times  and  in  all  countries  the  power 
of  taxation  has  been  used  by  those  politically  strong  to 
strengthen  themselves  and  to  oppress  those  politically  weak. 
It  would  be  unreasonable  to  expect  that  our  own  govern- 
ment would  escape  similar  influences.  Our  government  is 
too  much  of  the  people  to  be  really  for  the  people. 

Such  being  some  of  the  difficulties  in  the  way  of  the 
realization  of  the  ideal  system,  what  plans  are  practically 
available?  Among  the  most  prominent  plans  presented  in 
the  last  Congress  was  one  for  an  income  tax.  This  was 
rejected  because  it  was  felt  to  be  impossible  to  frame  an 
income  tax  law  which  would  be  constitutional  in  view  of 
the  recent  decision  of  the  Supreme  Court  in  reference  to 


460  UNIVERSITY  CHRONICLE. 

the  income  tax  law  of  1894.  Various  plans  were  suggested 
for  overcoming  this  adverse  decision.  Among  other  plans 
it  was  proposed  that  the  Supreme  Court  should  be  "  packed" 
to  secure  a  reversal  of  the  obnoxious  opinion.  This  sug- 
gestion is  revolting  to  every  honest  citizen,  whatever  view 
he  may  take  of  that  decision.  We  have  learned  by  the 
experience  of  a  century  that  the  Supreme  Court  always 
stands  for  the  best  good  of  all.  The  only  proper  way  in 
which  we  can  overcome  the  legal  verdict  of  the  Supreme 
Court  is  by  a  constitutional  amendment.  There  is  little 
doubt  that  an  amendment  intended  to  give  the  federal 
government  the  right  to  use  any  system  of  taxation  that 
may  seem  advisable  would  be  eagerly  adopted. 

But  until  such  an  amendment  is  adopted,  it  is  useless  to 
discuss  a  federal  income  tax.  Moreover,  it  is  quite  possible 
to  arrange  a  just  and  equitable  system  under  the  present 
distribution  of  powers,  and  it  is  at  least  a  debatable 
question  whether  the  income  tax  should  not  be  reserved  for 
the  States,  rather  than  be  used  by  the  federal  government. 
At  present,  the  taxes  used  by  the  majority  of  our  States 
are  frightfully  unjust  and  oppressive,  and  the  best  sub- 
stitute for  them  is  an  income  tax.  A  fairly  satisfactory 
system  could  be  arranged  consisting  of  indirect  taxes  for 
the  federal  government,  income  taxes  for  the  States,  and  real 
property  taxes  for  the  local  divisions.  At  all  events  this  is 
the  best  solution  possible  under  the  present  constitutional 
laws.  The  future  development  will  undoubtedly  require  a 
different  system  and  for  that  reason  it  is  to  be  regretted 
that  the  taxing  power  of  Congress  is  so  limited.  So  long 
as  the  State  governments  continue  an  important  part  of 
our  political  system  their  financial  support  must  be  assured, 
and  the  form  of  taxation  best  adapted  to  their  use  is  the 
income  tax.  An  "imperial"  policy  will  necessarily  lead  to 
greater  centralization  in  our  political  system  and  gradually 
the  functions  of  the  States  will  be  absorbed  by  the  federal 
government.  Indeed  the  movement  in  that  direction  was 
already  clearly  discernible  even  before  the  war.  A  uniform 


OUR  FINANCES  IN  THE  SPANISH  WAR.  461 

bankruptcy  law  is  but  the  beginning  of  federal  economic 
legislation.  We  already  contemplate  a  uniform  divorce  law 
as  a  desirable  probability.  That  is  the  beginning  of  federal 
social  legislation.  The  federal  government  has  already 
begun  to  regulate  adulterated  foods.  With  the  increase  in 
the  federal  military  power  the  State  militia  sinks  in  import- 
ance. In  short  there  is  a  decided  tendency  to  diminish 
State  activities.  That  the  "imperialistic"  movement  will 
strengthen  these  tendencies  goes  without  saying.  The 
importance,  therefore,  of  reserving  the  income  tax  for  the 
use  of  the  State  governments  decreases  as  the  power  and 
functions  of  the  federal  government  increase. 

Inasmuch,  however,  as  we  have  a  present  problem  to 
solve  we  must  solve  it  in  the  light  of  the  present  powers  of 
Congress.  Viewed  in  this  light  there  is  but  one  course  for 
Congress  to  pursue.  That  course  consists  in  raising  the 
the  required  revenues  by  the  least  objectionable  indirect 
taxes.  The  selection  of  the  articles  to  be  taxed  in  this  way 
so  as  to  form  a  fairly  just  and  equitable  system  is  no  easy 
matter.  In  order  that  the  revenues  obtained  be  sufficiently 
large  the  articles  taxed  must  be  of  large  consumption. 
In  order  that  the  expenses  of  collection  be  not  unduly 
increased  the  number  of  articles  taxed  must  not  be  great. 
But  a  tax  on  the  articles  consumed  by  the  largest  number 
of  persons  falls  more  heavily  on  the  poor  than  on  the  rich. 
What  the  rich  man  spends  on  tea,  coffee,  sugar,  tobacco, 
and  beer  is  but  a  small  fraction  of  his  income.  What  the 
poor  man  spends  on  these  is  relatively  a  large  part  of  his 
wages.  The  luxuries  of  the  rich  can  be  taxed  to  round  out 
the  system  a  little,  but  the  taxation  of  luxuries  is  not 
productive  of  much  revenue  and  the  expenses  of  collection 
are  relatively  great. 

In  short,  no  system  of  indirect  taxes  arranged  with  a 
view  to  getting  a  satisfactory  revenue  can  be  altogether 
just  and  equitable  in  and  of  itself.  It  must  be  supple- 
mented by  other  taxes.  The  taxes  levied  by  the  States 
and  cities  should,  to  make  a  well  rounded  system,  be 


462  UNIVERSITY  CHRONICLE. 

graduated  so  that  the  men  who  already  contribute  heavily 
according  to  their  ability  for  the  support  of  the  federal 
government  should  have  some  relief  from  the  other  burdens. 

The  experience  of  all  nations  has  shown  that  the  closest 
approach  to  justice  possible  in  the  use  of  a  system  of 
indirect  taxes  consists  in  laying  moderate  taxes  on  such 
articles  of  wide  consumption  as  salt,  tea,  coffee,  sugar,  and 
beer;  heavier  taxes  on  such  luxuries  as  wines,  liquors, 
tobacco,  and  silks.  In  this  connection  the  actual  systems 
of  other  countries  are  instructive.  England  has  customs 
duties  on  spirits,  beer,  tea,  tobacco,  wine,  coffee,  and  a  few 
other  articles;  and  excises  mainly  on  spirits  and  beer. 
The  articles  in  the  French  tariff  which  yield  any  consider- 
able revenue  are  coffee,  grain,  sugar,  petroleum,  wine,  and 
cocoa;  the  principal  excises  fall  on  wine,  spirits,  and 
tobacco.  German  excises  fall  on  drinks,  tobacco,  and  sugar; 
and  her  list  of  revenue-yielding  customs  duties  is  about  the 
same  as  that  of  England  with  the  addition  of  grain. 

As  was  suggested  in  the  last  lecture,  the  United  States 
could  obtain  ample  additional  revenue  (retaining  the 
protective  system  unaltered)  by  a  slight  increase  over  the 
old  rates  in  the  internal  taxes  on  tobacco,  spirits,  and  beer, 
and  moderate  taxes  on  coffee  and  tea  imported.  If  to  this 
list  there  be  added  taxes  on  wines  and  other  luxuries,  we 
should  have  a  fairly  satisfactory  system  without  heavy  rates 
on  any  one  article.  Summed  up  in  a  few  words  the  con- 
clusion is,  that  Congress  should  first  abolish  the  unjust  and 
unequal  taxes  imposed  in  an  emergency  by  the  war-revenue 
bill.  Then  as  a  second  step,  the  tariff  should  be  revised; 
not  by  juggling  with  the  protective  rates,  which  so  long  as 
they  remain  protective  can  never  be  made  to  yield  any 
considerable  revenue,  but  by  adjusting  the  rates  upon  the 
revenue-yielding  imports.  There  is  nothing  in  this  sugges- 
tion that  should  in  any  way  rouse  the  opposition  of  either 
party.  And  lastly  there  should  be  established  a  system  of 
excises  or  internal  indirect  taxes  on  those  luxuries  and 
comforts  of  universal  consumption  which  the  experience  of 


OUR  FINANCES  IN  THE  SPANISH  WAR.  463 

nations  has  shown  to  be  most  productive  of  revenue.  In 
short,  the  federal  government  should  obtain  its  revenues 
from  indirect  taxes  on  articles  of  widest  consumption  and 
lay  no  taxes  upon  capital  or  upon  industry. 

It  may  be  urged  that  such  a  system  of  federal  taxes 
would  not,  considered  by  itself,  lay  sufficient  burden  upon 
men  of  wealth.  But  the  federal  system  is  only  a  part  of 
our  tax  system  and  it  is  not  the  part  in  which  the  final 
adjustment  of  taxation  to  ability  should  take  place.  When 
properly  supplemented  by  the  State  and  local  systems  of 
taxation,  these  taxes  will  form  a  fairly  complete  system, 
which,  while  far  from  perfect,  will  be  a  great  advance  upon 
the  present  system. 


